Hi guys! Tim Melvin here, and welcome once again to A Better Way to Wealth!
Today, I’m going to talk about something I like to call “double buys.”
Now, we all know buybacks at bargain prices are very bullish.
And I know there’s a big buyback debate as to whether it is a waste of corporate money or not. Let me simplify that argument for you…
Corporations buying back stock works exactly like people buying back stock. If you buy it back at low valuations, it’s going to work out really well and increase the value of the company.
If, however, you use borrowed money to buy back stock at inflated valuations, well, that’s pretty stupid and is not going to work out well most of the time.
Corporate buybacks, using money generated by cash flow at bargain prices, are very bullish.
Insider open market buying, where they actually write a check or transfer funds from their own account to buy stock, is wildly bullish.
Now, it stands to reason that we would be very bullish on a company that is both buying back stock and has insiders who are actively buying stock as well.
Let’s look at a couple examples that I think have outstanding potential to buck what increasingly looks to be a negative trend and deliver tremendous returns in 2022.
Heritage Insurance Holdings
First up is Heritage Insurance Holdings (HRTG).
This company sells homeowners insurance as well as wind insurance. It’s residential personal lines in 15 states and commercial and personal lines, which includes multifamily dwellings, in New York, Florida and New Jersey.
Spanning 15 states with a focus in the East and Gulf coasts of the US, as well as a division operating in Hawaii, this stock consists of three separate companies.
There’s the Heritage business located in the northeast and Mid-Atlantic areas. There’s Narragansett Bay Insurance in the mid-Atlantic and northeast, and then Zephyr is the insurance company that does business in Hawaii.
Now, Florida is about half of the revenue for this company, and that is because homeowners and premiums for those of us that live in Florida are about twice the national average premium.
Homeowners insurance for those of us that live on the coast here in Florida, like I do, we’re more like four or five times the national average because we have those nasty hurricanes that like to come calling every year.
Now, they sell these things through independent agents, of which they have about 3,000 around the US whose main goal is to sell their insurance policies to their customers.
Look, this is actually a really conservative company that, in spite of being in what looks like a very high-risk business, is actually a pretty good business. We’ve invested in these companies before with a lot of success.
Very conservative reinsurance policy… They only retain so much risk and then put the rest off to a reinsurance company. And they also have a very conservative investment policy. They’re not taking very many risks because this is a short tail liability.
They’re writing one-year policies, so if they are going to have a claim, it’s going to be in the next 12 months. If you might have to pay claims in 12 months, you don’t put the money in a hedge fund.
You keep it in short term, very liquid bonds, and that’s pretty much exactly what HRTG has done with the money.
Again, a very conservative reinsurance policy, a very conservative investment policy and insiders own about 9% of the company, so they’ve got a lot of skin in the game.
It’s in their interest to do a good job and protect the company in bad years and grow the business in the good years. This is how these businesses work. These are very high return businesses over time, but can also be very lumpy.
For example, this past year, we had a lot of storms in the southern US, including tropical storms and a few hurricanes, and HRTG paid out a bunch of claims, losing some money.
Next year, maybe things won’t be so bad, and they’ll make a lot of money… Who knows?
Again, you lose a little bit in the bad years and make a lot in the good years, which is why I refer to this as a very lumpy business.
But, if you average it out over time, it’s actually a very good business, and they’ve been growing the book value as a result.
They’ve got a strong history too, by the way, of being very shareholder friendly.
They’ve been buying back stock continuously over the years, with a dividend yield a little over 3%, and just announced a new $25 million buyback that’s going to equal about 14% of the company!
We’ve also, in the last six months, had some insider buying by top executives.
So, we’ve got the insiders who own a lot of stock and have been buying more, and they’re using corporate cash flows to buy back stock in the open market, making two potential price supports for this company.
And did I mention this stock is dirt cheap? It’s at 93% of tangible book value and less than two times the cash flows being generated by the business. In a more normal year, I think the stock could trade at least two times the current price.
It will be a business that has a decent growth rate, which means you could be looking at a two, three, four times or more return from HRTG, as it is now a double buy with a large stock buyback plan in place and recent insider buying.
1847 Goedeker Holdings
Next, I want to point out that a stock we’ve talked about before is also seeing double buys right now. Don’t buy a whole lot, but buy some of 1847 Goedeker Holdings (GOED).
This is an Internet retailer of appliances and furniture where, once again, insiders currently own a ton of stock.
The CEO is still buying, making a $1,000,000 buy back in December! We’ve also seen a bunch of other six-figure buys in the last 60 days as insiders continue to load up on this stock.
Now, the stock has not done well since its 2019 IPO and is currently trading around $2.00.
Again, this is another one where, if the business model that they’re using to sell appliances and furniture more cheaply than brick and mortar stores works out, this could easily be a stock that gives you somewhere between five and 10 times return on your money.
Insiders believe it’s going to happen. They’re buying stock, and we can see the board agrees with them because they just announced another big stock buyback of $25 million, or about 10% of the company.
So, there are two stocks with double buying that I think have the potential to be massive winners from current price levels no matter what the market does in 2022.
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