Assured Guaranty (AGO) has been a pillar investment for first myself in 2009 and T&T Capital Management since its founding in late 2011. For an example of our investment thesis please review this article I wrote in 2011:
Due to record low interest rates, municipal bond insurance market demand has declined, which has reduced the company’s ability to write new business. As amortization of previously written policies continues, the company finds itself in a position where it is vastly overcapitalized. In addition, pessimism pervading the industry has caused the stock to continue to trade at huge discounts to a conservative proxy for liquidation value and the company gets no credit for its growth potential. The stock has been trading in the low $20’s despite a liquidation value of roughly $36.65 and a potential long-term liquidation value of $52.59. This is a business that maintained profitability in terms of operating profits, throughout the Financial Crisis, which very few companies in the financial industry were able to do.
Now because the company is overly capitalized, management has astutely made the decision to aggressively buy back stock. Since September of 2013, AGO has bought back 13% of shares outstanding, 10% this year alone. Being that these buybacks were down at such a large discount to intrinsic value, the intrinsic value of the stock has risen considerably during that time. The company just reported earnings yesterday and the stock is rallying nicely as a result, but this is truly just the beginning. This is a huge position for our firm and has been for some time. We’ve been long the stock and have sold countless profitable puts over the last few years for our clients. While volatility in the stock has always been high, the risk has always been extremely low due to the strong financial position and dirt cheap price relative to value. I’m confident that there is 50-100% upside over the next 3-5 years in this investment.
AGO is really a proxy for our large investments in financials. The big banks and insurance companies that we own are all overly capitalized. They all trade at huge discounts to intrinsic and liquidation values, despite being in some of the best financial conditions in their respective histories. All of them are nicely profitable and have profit margins that are likely to increase with or without higher interest rates. I haven’t been mentioning specific stock names in too many articles because we make a strong effort to keep that info proprietary, but below is a list of stocks we own and conservative estimates of liquidation value. Often liquidation value is much lower than our estimate of intrinsic value, so we view it as our most conservative metric. Keep in mind that not everybody owns each stock, as every individual’s situation is different.
In summary, we believe that there are massive opportunities to make a lot of money over the next 3-5 years, with phenomenal risk versus rewards ratios. This is why personally, I keep adding to my investments despite the market being at record highs. Of course there will be volatility and we do not expect to outperform every quarter! But, if you can be patient and take the long-term approach with us, I’m confident that we will build considerable wealth through these investments. Thank you very much! If you have any questions, please don’t hesitate to contact me directly at 949-630-0263.