Tuesday, January 29, 2008
by David Yu
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2/12/2008: Pre-market news wire this morning reported
20% interest rate bailout terms entered with investor group led by
Goldman Sachs. I didn't like this and other terms in the agreement. I
closed out my MGI holding at $5.51 for a 10.20% gain (see order ledger
below). Waiting for new
entry point at lower price.
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1/31/2008: Bought MGI shares back at $5.00 - see order ledger below.
Initial long position got stopped out at $5.11 yesterday.
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It looks like the market had finally reached a short-term bottom on Wednesday, 1/23/2008, the same day I started shopping for value plays like Intel (INTC). I continue to maintain that the market had overreacted to the Iowa caucus results on January 4. This then presents trading opportunities for either short-term profits or long-term holding, depending on where the market wants to go next. There's no need to get personal being a bull or a bear. We study the language of the market, and we trade with the market.
I've always been fascinated by worldwide money remittance services, especially person-to-person transfer. I've actually looked into the possibility of owning business like this in the past. Every year, global migration resulted in hundreds of $billions in remittances. It's a growing industry with estimated double-digit growth over the foreseeable future. Mexican immigrants alone, for an instance, send approximately $20-$40 billion of their earnings to Mexico annually. Incidentally, of all the talks of strengthening border security, none would be more effective than having a prosperous Mexico as our neighbor in the south. But, no presidential candidates have that on their agenda.
In any case, MoneyGram International (MGI) is the 2nd largest money transfer service in the world. Unfortunately, due to MGI's speculation in subprime CDO's, its share value had tanked more than 80% since July, when the subprime mortgages started to unravel.
MGI's total loss in subprime mortgage related investments was estimated by some analysts to be $1.6 billion, which was coincidentally the same amount of money (equivalence of approx. $20/share) the 3rd largest money transfer service, Euronet Worldwide (EEFT), had offered to buy MGI just 2 months ago. It's unlikely for MGI to get anything close to that original offer by now. MGI, nevertheless, had signed a confidentiality agreement and held talks with EEFT. MGI also continues to shop around and negotiate with other interested parties.
MGI had since taken the loss and liquidated the majority of its subprime holdings. Based on its competitors' P/E and the revised lowest estimate of MGI's earnings next year, $6.80 appears to be a fair value for this stock. Analysts' average estimate of next year's earnings, on the other hand, could take this stock up to the $20 range. Barring any undisclosed surprises, MGI's current price in the $5 range seems undervalued by any account.
Technically, the 30-minute 6-day intraday chart indicates it had out-performed the S&P 500 by almost 6% since the market bounced back on 1/23/2008 (see lower pane of Chart 1 below).
Chart 1
When MGI rose above yesterday's closing price of $5.37 for the 3rd time this morning (see Chart 2 below), I went ahead and added it to my portfolio at $5.38. I'm looking at 30% short-term trading profit based on my target price of $7.00. It could also turn into a longer term holding as a leverage buyout target. But that's not likely to happen unless MGI straightens out its book first. And, that may take a while.
Chart 2
There are two possible downside cautions. One obviously is more surprises from its subprime mortgage portfolio. The other concern is that this stock had already appreciated 37% over the past 5 days. It may be due for a breather at this price level. A tight stop is always prudent. It never hurts anyone to take profits.
Good hunting!
David Yu