Strong Earnings for AGO

Dear Investors,

Last Thursday, AGO came out with very strong earnings!  Book value continues to grow and the company continues to be profitable, despite the fact that AGO increased reserves for Puerto Rico credits by the largest amount yet.  The stock has been hit pretty hard lately as there is a short seller that has been negative on it and obviously, all the news after a hurricane is negative.  This has created the best buying opportunity we have had in years.

While we have certainly bought AGO at cheaper levels, it is important to understand that the fundamentals have improved each quarter to the point where right now the disconnect between price and value is as great as it has ever been.  As opposed to just buying stock outright, we have mostly been selling puts both in and out of the money to take advantage of the heightened volatility.  I expect that we are going to do very well on these investments!

Fortunately, we’ve had some really good developments in other large positions like ALLY, GM, and Qualcomm, which has enabled us to free up capital for us to add to our positions in AGO.  Not only are we adding, but management approved another $300MM stock buyback.  At current prices, every $1 they spend to buy back stock, creates more than an additional $1 in adjusted book value.

As I’ve said, I’m very negative on the overall market, but this opportunity sets the stage for potential double-digit returns with what I believe to be a far lower risk profile than the overall market.  The key to realizing these potential returns as always is patience and discipline.  We are zagging to the market’s zigging.  It can be no fun during short-term periods when value or individual stocks are out of favor, but in the long run it is the best way to outperform.

Thank you very much and as always please let me know if you have any questions whatsoever!

Assured Guaranty – Fundamentals Trump Negative Hype




Tim Travis