Help me evaluate this investment

[RISP]

Hi there, I've been following this company for a while now, but it's stock is not behaving as I would expect: DL:EN Amsterdam Stock Quote - Delta Lloyd NV - Bloomberg Markets

Full disclaimer: I have a small position in DL in my gambling account. It is currently down -45%. I guess this tells you all you need to now about my stock picking skills.

But let's focus on the current and future situation: After a lot of turmoil, Delta Lloyd NV, a Dutch insurance company, has recently completed a rights issue. Management feel they are now sufficiently capitalized. There are some issues, but the business is profitable.

Here's the kicker: They published their generally positive half-year figures today, and the stock price rose some 4%. But it still seems dirt-cheap to me! Consider these two figures:
1) The current market cap is ~1.66 billion euros, but shareholders' equity is 3.79 billion euros.
2) If you are looking for income, the (already severely reduced) dividend they announced today is 0.28 euros per share, for a yield of 7.7%.

Is this an opportunity to buy a dollar for 44 cents, or am I overlooking something?

If anybody enjoys this kind of exercise, I would be glad if you shared some insights. You can find the full financial report here: https://www.deltalloyd.com/media/205476/interim-financial-report-half-year-2016.pdf, or a somewhat condensed writeup here: Good progress on capital and cash

 

[pb4uski]

My thinking is that if Delta Lloyd had a bright financial future, Aviva would have kept them.

 

[RISP]

My thinking is that if Delta Lloyd had a bright financial future, Aviva would have kept them.

They sold it over 3 years ago. I don't think that decision means it cannot be a good investment today, at today's price. Or would you avoid an investment in Chipotle, just because they were once sold by McDonald's?

 

[pb4uski]

They sold it over 3 years ago. I don't think that decision means it cannot be a good investment today, at today's price. Or would you avoid an investment in Chipotle, just because they were once sold by McDonald's?

Go for it. You may be right, but I'm skeptical. Aviva got rid of them because they were a dysfunctional mess and history seems to be bearing that out.

DL was at 12.65 when Aviva unloaded it and is now at 3.80 so at least so far, Aviva look pretty damn brilliant to me. DL was 11.33 a year ago so the market seems to think they are broken too.

 

[DrRoy]

I personally do not any longer buy individual stocks. I have become and index guy only. That being said, it is generally thought that stocks are rather always fairly priced in the market based on the information that is known. The price is the collective result of all the buyers and sellers. When the price changes over time that is because of new information that either generally or specifically affects the company. Your experience and study of this stock is deeper than what we in the forum are likely to have so your opinion is better informed. Plus, it's your money so the stakes are different. Go with your judgement.

 

[Totoro]

Putting this here as a reminder for myself. I'm interested in doing a first analysis.

I live in the Netherlands and speak Dutch, so there might be some insight for you, who knows

Thinking this weekend earliest though, I haven't done an insurance company before from a 'me owning shares' perspective. (But am familiar with the dynamics).

Very first glance: Other insurers seem to valued at around 0.4 P/B too right now (Aegon and NN are two big competitors here), just like quite a few (European) banks.

That means there is very low trust in the sustainability of that dividend.

 

[Sunset]

What happened August 7, 2015 to cause it's stock to fall from $11.xx to $3.xx in 4 months ?

 

[Sunset]

I see, they diluted shares by just over 1 billion euros, and cancelled the dividend. Plus sell off some assets.
No wonder the value has dropped..

 

[nash031]

I see, they diluted shares by just over 1 billion euros, and cancelled the dividend. Plus sell off some assets.
No wonder the value has dropped..

Yeah... pass.

 

[RISP]

Thanks for all comments so far.

Go for it. You may be right, but I'm skeptical. Aviva got rid of them because they were a dysfunctional mess and history seems to be bearing that out.

DL was at 12.65 when Aviva unloaded it and is now at 3.80 so at least so far, Aviva look pretty damn brilliant to me. DL was 11.33 a year ago so the market seems to think they are broken too.

Well, you are obviously right that the market doesn't like the stock. My point is, is the deep discount it currently trades at justified, or exaggerated? Besides, looking only at the stock price while ignoring the underlying financials is pointless.

That being said, it is generally thought that stocks are rather always fairly priced in the market based on the information that is known.

I'm familiar with the efficient market hypothesis, but I believe it is not always correct in the short run. Sometimes the market exaggerates the impact of new information, in both directions. Like, when everything dropped 10% on the day the Brexit decision was announced. Those losses were exaggerated by irrational fear IMO, and they were fully recovered within days.

Putting this here as a reminder for myself. I'm interested in doing a first analysis.

I live in the Netherlands and speak Dutch, so there might be some insight for you, who knows

Thinking this weekend earliest though, I haven't done an insurance company before from a 'me owning shares' perspective. (But am familiar with the dynamics).

Very first glance: Other insurers seem to valued at around 0.4 P/B too right now (Aegon and NN are two big competitors here), just like quite a few (European) banks.

That means there is very low trust in the sustainability of that dividend.

Great, I'm looking forward to your findings. I was kinda hoping you would chime in here. IMO, the now much lower dividend should be sustainable, but let's see what you come up with. You are right about the P/B ratio, but e.g. German Allianz is trading at 0.9, and even Italian Assicurazioni Generali, who have issues of their own, is at 0.7. So there may be room for improvement. For the moment, I think I'll just hold my existing position in DL.

 

[DrRoy]

I'm familiar with the efficient market hypothesis, but I believe it is not always correct in the short run. Sometimes the market exaggerates the impact of new information, in both directions. Like, when everything dropped 10% on the day the Brexit decision was announced. Those losses were exaggerated by irrational fear IMO, and they were fully recovered within days.

Yes, Brexit is a good example that market emotions can get out of whack. In this case though, the stock had a big drop a couple months ago and there has been time for the emotions to calm down.

 

[nash031]

Well, you are obviously right that the market doesn't like the stock. My point is, is the deep discount it currently trades at justified, or exaggerated? Besides, looking only at the stock price while ignoring the underlying financials is pointless.

I'm familiar with the efficient market hypothesis, but I believe it is not always correct in the short run. Sometimes the market exaggerates the impact of new information, in both directions. Like, when everything dropped 10% on the day the Brexit decision was announced. Those losses were exaggerated by irrational fear IMO, and they were fully recovered within days.

You are obviously correct that the stock is deeply discounted, but I don't think that necessarily makes it a great value. The biggest red flag to me is the cancellation of the dividend very recently. I personally wouldn't touch it after that, particularly when they bring it back and it's such a high yield. It seems unsustainable. Then again, I wouldn't invest there because it's unfamiliar territory to me personally.

At this point, I think an investment in that stock is speculative based on price. While I agree that the market is inefficient over the short term - essentially the basis of all value investing - I don't think I would look to this particular issue as either "value" or "investing".

 

[RISP]

The biggest red flag to me is the cancellation of the dividend very recently. I personally wouldn't touch it after that, particularly when they bring it back and it's such a high yield. It seems unsustainable.

OK, but in order to evaluate that, wouldn't it make more sense to look at how much profit they (will) make and how big the share of the dividend is?

If I understand this correctly, the consensus estimate for net profits is around 1.00€/share, and the planned dividend is 0.28€/share.

Don't get me wrong, I do not want to hype the stock, and I'm fully aware that it's highly speculative. I'm just genuinely curious about the valuation.

 

[pb4uski]

....If anybody enjoys this kind of exercise, I would be glad if you shared some insights. ...

A bunch of people have shared their insights with you.... most are bearish and one is still looking at it. Skepticism abounds about this ticker, but you seem to want to debate each response. You are obviously bullish on this dog, so why don't you just do what you want and see how it turns out.

 

[RISP]

A bunch of people have shared their insights with you.... most are bearish and one is still looking at it. Skepticism abounds about this ticker, but you seem to want to debate each response. You are obviously bullish on this dog, so why don't you just do what you want and see how it turns out.

pb4uski, I'm interested in an educated exchange of ideas. Such a debate requires people taking opposite sides of the issue. Honestly, if this rubs you the wrong way, why do you keep posting here?

All comments are welcome, but I'm most interested in facts and analysis. You know, cold hard numbers rather than feelings.

 

[Sunset]

OK, but in order to evaluate that, wouldn't it make more sense to look at how much profit they (will) make and how big the share of the dividend is?

If I understand this correctly, the consensus estimate for net profits is around 1.00€/share, and the planned dividend is 0.28€/share.

Don't get me wrong, I do not want to hype the stock, and I'm fully aware that it's highly speculative. I'm just genuinely curious about the valuation.

You have a possible choice here, you could double up on the investment, wait 30 days to get past the wash rules and then sell your original investment, so you capture the loss for taxes while maintaining your speculative investment.

 

[RISP]

You have a possible choice here, you could double up on the investment, wait 30 days to get past the wash rules and then sell your original investment, so you capture the loss for taxes while maintaining your speculative investment.

That's an interesting idea. AFAIK, my legislation (Germany) doesn't even have wash rules, so I could do that right away. I definitely will look into selling at least part of the position still this year for tax loss harvesting purposes.

 

[4nursebee]

RISP, your original post is too confusing for me to understand the company or why one should invest in them so it is a no for me. In order to understand your investment better I would ask

What is it you want? What are your investing goals?
What methods do you suggest to achieve those goals?
How specifically does this company fit the above criteria?

 

[RISP]

RISP, your original post is too confusing for me to understand the company or why one should invest in them so it is a no for me. In order to understand your investment better I would ask

What is it you want? What are your investing goals?
What methods do you suggest to achieve those goals?
How specifically does this company fit the above criteria?

Good questions.

What is it you want? - Money, lots of it.
What are your investing goals? - One day, I want to have so much money that I will not have to work anymore, unless I want to.
What methods do you suggest to achieve those goals? - Work hard, live modestly, avoid debt, save a lot, invest wisely, stay married.
How specifically does this company fit the above criteria? - First, I think this needs to be separated from my main game plan, which consists of index funds and buy-and-hold. What we are talking about here is a smallish position in the speculative part of my holdings. Call it the 'fun money' if you want. What I'm trying to do there is to buy stocks that I consider 'cheap', with the intention of either holding them indefinitely or selling them once the valuation normalizes. Does DL fit that definition? Well, that's the question. I think it might, but most posters here seem to disagree (though nobody has yet really analyzed the valuation. Maybe Totoro still finds the time to review it and share some of his findings).

What exactly did you find confusing about my original post?

 

[4nursebee]

I would argue a couple of points.

Your goal is too generic, I hope you better define it.
How much money will it take to FIRE?

With such an important goal, why separate any money from that goal?

I have no fun money, I do not gamble or speculate.

If this investment were part of your real money, is it the best way to get obtain your goal? Is choosing a "cheap" stock a good idea, and if so, how?

I think most posters here agree that DL is a cheap stock. I think they disagree with its chances of adequate returns.



FWIW, I prefer to focus on companies that can experience exponential growth in new markets.

If the market cap is 1.6B euros, THAT IS THE SHAREHOLDER EQUITY. No more analysis required.

 

[RISP]

I would argue a couple of points.

Your goal is too generic, I hope you better define it.
How much money will it take to FIRE?

25-33x annual expenses, whatever they may be in 10-20 years. I cannot answer that question, since I do not know anything about future inflation, among other things. Which career will the kids choose? Will I have to support them through college? Will my parents need help in their old age? Etc., etc. For the time being, I'll focus on those things I can control: Earning, spending, saving, investing. And enjoying life.

With such an important goal, why separate any money from that goal?

It's gonna be AT LEAST a 20-year journey to FI, probably a lot longer. I think I deserve some fun along the way. It's my money, I earned it myself, and I'll spend/save/invest it as I see fit.

If this investment were part of your real money, is it the best way to get obtain your goal?

Again, you are repeating my own question: Under the circumstances, is this an attractive stock or not? I believe that, in order to find out the answer, one needs to analyze the financial statements of the company rather than just say "I wouldn't buy it, the stock price used to be higher" or "I wouldn't touch it, they cut the dividend".

Is choosing a "cheap" stock a good idea, and if so, how?

I believe it is, yes. At the same time, I'm fully aware that this is a belief, not a scientific fact which I could mathematically prove. How you choose them? I believe that the stock markets do not always price equities correctly in the short run. IMO, the pendulum swings between irrational exuberance and unwarranted pessimism. This sometimes allows you to pick up a bargain. Identifying bargains requires comparing (a) price and (b) value.

I think most posters here agree that DL is a cheap stock. I think they disagree with its chances of adequate returns.

That statement doesn't make sense to me. The word "cheap", to me, implies a low price relative to the underlying value. If the stock will not produce adequate returns, it is not cheap, but priced correctly. It might even be expensive!

FWIW, I prefer to focus on companies that can experience exponential growth in new markets.

OK, so you are also a stock picker, but you believe in growth- over value stocks. Fair enough. How do you identify those companies who 'can experience exponential growth in new markets'? Also, are you familiar with the research on the performance of growth- vs. value investing?

If the market cap is 1.6B euros, THAT IS THE SHAREHOLDER EQUITY. No more analysis required.

I respectfully disagree. That is the market price. 'Shareholders equity' is a defined term and means something else, namely the difference between total assets and total liabilities (Shareholders Equity).

 

[4nursebee]

Cheap was your word as to what you look for in a stock. What future does this company have? What earnings growth?

I do not value what you refer to as shareholder equity. As an investor I can't pull any money out of the company saying it is my share of equity. My equity in a company is what the stock trades at. If you are able to ID situations that price goes up based on mispricing, so be it, good work.

If you really want to know what I do, send me a Private message please. I am not interested in publicity.

What you seem to be asking for overall is for someone to do some footwork investigating this company in depth and then to argue on the basis of their footwork. I have no interest in that exercise.

Why did you buy the company when it was 45% higher? Was there a value argument to make then? What was the shareholder equity then? What time frame did you give for the investment to work out? Did you really have a plan when you bought it?

How long have you used this play fun money concept? How has it performed relative to the overall market?

 

[LOL!]

What else could you do with this money instead? For instance, suppose for some reason you were prohibited from ever buying this stock. What would you do with the money?

 

[nash031]

OK, but in order to evaluate that, wouldn't it make more sense to look at how much profit they (will) make and how big the share of the dividend is?

If I understand this correctly, the consensus estimate for net profits is around 1.00€/share, and the planned dividend is 0.28€/share.

Don't get me wrong, I do not want to hype the stock, and I'm fully aware that it's highly speculative. I'm just genuinely curious about the valuation.

What you're asking me to do is not something that I am comfortable as an individual investor in doing, and that is investing based on earnings projections. Looking into and attempting to project the future is the very definition of "speculation". Past is not determinant of future performance, but it's often a pretty good indicator. As a value investor, which I fully understand you may not be, this issue doesn't pass the sniff test of even a cursory evaluation and I would personally stay away.

You may do as you wish and trust your own instincts and evaluation. That's the name of the game.

 

[nash031]

I missed the nugget where you already have a position in this stock. My advice to you would then be two-fold:

1) Re-evaluate the assumptions/conditions under which you bought the stock in the first place. If they still hold, then buying more indeed makes sense. If they don't, then you need to convince yourself that the new set of circumstances warrants purchase as a separate purchase, not based on old information.

2) Don't throw good money after bad. That is, don't buy more of a dog just because it's a cheaper dog.


I bought AAPL a while ago at a split adjusted price of $450/share. It subsequently dropped to $350 and I bought even more at $375 because it was a great company and it was a good value at the time. The $375 purchase has out-paced the SP500 substantially. The $450 purchase has not. So price matters, but it's not the only thing that matters as you know!