I spend a lot of time every week scanning and searching the market (using a wide range of tools) for stocks that are unreasonably underpriced.
One of those tools that I faithfully review is the Money Morning Stock VQScore. Stocks with the highest VQScore have done very well historically, and their approach finds stocks positioned for liftoff soon. And that’s just one of the tools I use every week.
[Recently], I ran across Tiptree Inc. (Nasdaq: TIPT) on the list of stocks with the highest VQScores. Tiptree fits most of my parameters as well so I spent a little time digging into the company further.
I have said many times that I love owning property and casualty insurance companies. It is profiting from pure math.
I often compare it to owning a casino where you do not have to buy customers free drinks or have dancing girls parading around to keep them at the tables.
Customers are betting something terrible will happen, and the insurance company is betting that nothing will happen. They use math to determine how likely the bad event is to occur and then charge accordingly.
Property and casualty insurance has been a big part of several vast fortunes, and I love finding P&C companies priced at bargain levels that I can use to build my fortune.
Tiptree is priced right at current levels. Here’s a closer look…
Why Tiptree Stock Is a “Pure Profit” Play for Investors
The stock is trading at just 65% of book value and has a P/E ratio of only 7.9. The stock is yielding a little over 2%, and the company has been very actively buying back stock over the past few years, so management is pretty shareholder-friendly. If shares of Tiptree just trade up to insurance industry average multiples, the stock would almost triple from current levels.
The best part of Tiptree’s insurance operations is that it’s not just like owning a casino. It’s like owning a casino where everyone plays keno, bets every point at the craps table the hard way, and hits on 18 when playing blackjack. They sell credit insurance and are growing their product warranty business.
The warranty business sells extended warranties, which kick in after the manufacturer’s warranty runs out on things like automobiles, mobile devices, consumer electronics, appliances, and furniture and bedding.
No one should ever buy credit insurance or extended warranties, but it is incredibly profitable to sell.
Think about the last time you were talked into buying an extended warranty on something. Do you even know where the paperwork is or what is covered? As for credit life, if you have a proper life insurance plan, you have already planned for paying down debt in the event of your demise. So adding high-cost credit insurance is unnecessary in most cases.
There is a reason that Tiptree consistently has a very low loss ratio and is consistently profitable in their insurance operations. The sell something that is unlikely to ever have to pay out benefits.
It’s almost pure profit.
I would be interested in this company if all they had was the insurance business, but that’s far from their only operation.
They also have an investment business that has corporate credit investments, a mortgage operation that holds a significant position in Invesque, and a Canadian company that owns senior living facilities in North America. There is also an asset management division that manages credit investments for pension funds, hedge funds, other asset management firms, banks, insurance companies, and other institutional investors.
These divisions represented about half of the company’s earnings in the first quarter of 2018.
This is a classic good business at a great price.
Management has taken definitive steps in the past year to de-risk and simplify the business. They’ve deleveraged the balance sheet, sold off the jumbo mortgage origination business, added to the insurance company capital base, and eliminated the dual-share class structure that’s been in place.
All of this makes Tiptree better positioned to grow at a very high rate. It also makes the story easier for Wall Street and institutional investors to understand and support (and by support I mean buy the stock in amounts that move the share price closer to the real value of the company).
The company continued its shareholder-friendly approach in the most recent quarter. They have a $20 million buyback plan in place and raised the dividend by 16.7%. That makes sense because insiders own 22% of the company. To make themselves wealthy, they have to take us along for the ride.
Tiptree is an excellent business available at a great price. Just trading at the same valuation as their competitors would give us an almost 300% return on our investment.
— Tim Melvin
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Source: Money Morning