Sold $HCII, 96.23% Gain in 4 Months

by on July 18, 2012

in Sales, Small Cap Value Stocks

Last week I sold off Homeowners Choice (HCII), a Florida based Property insurer. The stock was initially recommended to the Premium members in March of this year, and I purchased the stock for the Value Stock Guide portfolio on Mar 02, 2012 at an average cost of $11.18/share including commissions. The stock was sold at $22/share on July 10, 2012.

The 96.23% gain does not included dividends received, which currently yield 4.4%, or 7.2% based off the original purchase price. Including the 1 dividend of $0.2/share that was received during this period, the total return from the stock is 98%.

  • Purchase Date: Mar 02, 2012
  • Average Cost: $11.18
  • Sell Date: Jul 10, 2012
  • Sell Price: $22/share
  • Capital Gains: 96.23% net of commissions
  • Total Returns: 98.01% net of commissions

Coincidentally, $22/share has so far proven to be the all time high for the stock. It is however important to remember that I set the sell price targets when the recommendation is initially made. In this case, I had set the sell target of $22/share way back in March and unless the changes in the business warrant updating the targets, we follow through on the sell targets with discipline.

Why the Stock was Recommended?

Late last year, Homeowners Choice more than doubled its book of business at very little cost when State of Florida helped it take over policies from the struggling Homewise. However, the stock continued to trade as if the transaction never happened. The transaction helped HCII to double its revenues with little loss in the margins.

The catalyst in this case was very simple. As further quarterly reports come in, they would show revenues and EPS increase 100% or more, drastically changing its multiples and bringing the stock to the attention of the general investing public, and perhaps, even Wall Street. That has happened now, the stock has responded and publications such as Seeking Alpha are now full of articles talking about HCII.

Should You Buy HCII Now or Sell?

The current price of $18/share compared to my sell price of $22/share would indicate a possible upside of another 22%. A good question to ask would be if I am going to get back into the stock at these prices and whether it is a good buy today. Here is what I think.

HCII was one of those rare stocks where the upside was more or less guaranteed and was going to be relatively quick. It also didn’t hurt that the company set the stage by increasing its dividend 3 times in 3 consecutive quarters. This was the easy money. As easy as it gets in investing.

What comes next is essentially making a bet. Buying now, you will be making a bet that the management continues to excel and deliver (and by all accounts, they have been very competent and extremely shareholder friendly). A bigger bet you will be making is that Florida has a benign hurricane season this year. Since the company only insures homes in Florida, it is particularly exposed in this area, even with the levels of reinsurance coverage it maintains.

I can bet on investor behavior and win. Betting against nature is not my strong point and I will pass.

PS. Incidentally, this will be the last sale report I post publicly for non premium members. You will still be able to follow my portfolio and look at the recent sales, at least for a little while. There might be a few more changes as I work towards changing the Premium membership from the current "open registration" (anyone can sign up when they please) to a more selective "invitation" format, where you will be able to express your interest in joining VSG Premium and can do so if an invitation is extended to you.

Leave a Comment

pbanik July 18, 2012 at 9:59 pm

You made an excellent decision to purchase this stock. What I can’t understand why you chose to sell it, unless you’re taking into account the riskiness of the industry sector they’re operating in, which is understandable, or you’re viewing at a stock to trade in, not invest in long term.
It’s been rated 8 out of 10 on StockScouter.  
http://investing.money.msn.com/investments/stock-ratings/?symbol=HCII
 
The Street gives the stock an A and the recommendation is to Buy.
http://www.thestreet.com/r/ratings/reports/summary/HCII.html
 
Looking at the valuation, HCII is superior to the industry and the S&P500 on all valuation metrics except Price/Book and Price/Sales versus the industry.
http://financials.morningstar.com/valuation/price-ratio.html?t=HCII&region=USA&culture=en-US
 
The dividend yield is over 4%, while the S&P500 average is 2.2%, while the industry average is 1.9%
 
Book value/share is $10.61, meaning you bought it at slightly above bookvalue.
http://ca.finance.yahoo.com/q/ks?s=hcii
 
Shailesh, we briefly talked about TFSAs and RRSPs in emails. I haven’t done much trading, but I’m thinking of using the RRSP for longterm investing (retirement planning and wealth building) and TFSA for trading and investing (speculation would be done in this account). I did go long on F, as a possible turnaround, and BRK, mainly because it returns outstanding value for the share price. BRK’s bookvalue/share is $106587.33.

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ShaileshKumar July 19, 2012 at 12:33 am

 @pbanik Paul, Thanks! The risk reward ratio in my opinion is not attractive anymore. As I said, there was a small window to make pretty much risk free returns on this stock and that window is fast closing or has already closed as we approach the hurricane season. A reasonably active hurricane season in Florida can wipe out a good chunk of company’s profits. Since HCII is all but a 3 year old company, and there have been no hurricanes of any significance in that time period, no one knows how the company will perform under those conditions.
 
Regarding stock scouter and The Street ratings, it is rather unfortunate that these guys were no where to be found when the stock was around $10/share and it was truly a buy. I am pretty sure they look at all the relevant ratios to come up with the ratings but they have in all likelihood not considered some common sense aspects of investing in a property insurer in Florida during a hurricane season.
 
I lost all respect for The Street ratings after they rated one of the stocks I owned as a Hold 2 weeks AFTER the company was acquired.
 
Investing is investing. I am a long term investor in the sense that I am willing to wait years to profit for the right stock, but if I am presented with an opportunity to make a few years worth of returns in few short months, I will not turn it away. When you write “stock to trade” it indicates speculation. There was nothing speculative about this investment. As a value investor, I look for mispriced opportunities and certain special situations where in my judgement the odds of success are overwhelmingly positive. Some of these situations work out relatively quickly, and some others take time. HCII worked out pretty much to the time line I expected and exactly to the price level I had set as the target for sell.
 
The recent flood of articles in Street.com, Seeking Alpha and other similar sites singing the praise of HCII no doubt helped the stock reach my target quickly. For that I am eternally grateful to these publications. Really. But in most cases when these guys find out about a stock, the bulk of the easy profit is already made.
 
At this point, taking a new position in HCII is speculating that the hurricane season will be mild and will pass without major impact. Perhaps it will be, but it is still speculation, isn’t it? And what is the upside from here that justifies making this bet? As far as I can see, the stock is more or less fairly valued right now and it is trading at twice the book value, or roughly around the multiple that Berkshire Hathaway typically trades at
 
And that segues nicely into F and BRK holdings. I think you will do well with F. Not so sure about BRK but the risk is lower with BRK. With Buffett and Munger on their way out, I would like BRK to start giving out a dividend. All the best on your portfolio set up. Sounds like you have a plan that can work for you.

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pbanik July 19, 2012 at 5:16 am

 @ShaileshKumar 

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pbanik July 19, 2012 at 5:31 am

I think long-term investing is the appropriate course for retirement planning and wealth building, but I can see the argument for trading. It doesn’t have to be an either/or. Speculation can be profitable if it  I read Jim Cramer’s Real Money, and he talks about he does both. He invests in his 401 (k), but he also speculates. He says it’s ok to do both, as long as you understand the risk. He doesn’t believe in buy and hold. He believes in buy and do your homework. With the way, some of these companies operate I understand what he is saying. He uses Enron as an example.  As for diversification, I can’t recall if he’s in favor of it or not. He does have some good ideas, and he must know something, because in a 13 year run managing money, I think he had only one year where he wasn’t  in the black. For the most part, he beat the S&P500 more often than not. When I was on Seeking Alpha, I was arguing against buying Sprint (S), looking at the financials, but then I can see their point. People wanted me to take advantage of  the opportunity, and not to miss their upside. The same applies for AlcatelLucent (ALU), which is trading at less than book right now.  Judging from what I read on Seeking Alpha and Motley Fool, don’t invest in Nokia (NOK) or Research in Motion (RIMM) for now. The sentiment is these companies may not be turnaround stocks, but companies that may not exist. Well I plan to build my portfolio one block at a time, and then pare or sell or buy over time. If I ever accumulate enough money, I can buy some insurance product like an annuity to have some form of income, and use the rest for investing.  NBR had a feature on housing stocks, and there were some good ones. but the website is down, so I can’t provide the link right now.

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