CACC Part 4: Will subprime auto lending end badly?

I think that the word “subprime” has an undeserved reputation.  The US subprime housing crisis was a very unusual situation caused by extreme levels of loan fraud and loans designed to blow up (e.g. ARM, negative amortization mortgages, etc.).  These excesses do not exist in other areas of subprime lending.  During the housing bubble, lenders did not verify income and allowed unemployed individuals to buy millions of dollars of housing.  In the current auto market, the lenders actually check that the information given to them is correct.  According to CACC’s training website, 75% of loan applications are initially rejected due to problems with the loan application (e.g. a utility bill to verify residence is too old).  The subprime lenders tend to perform the most loan compliance work (out of necessity) while prime lenders have fewer stipulations, looser loan compliance, and less onerous paperwork.

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CTGO: Closed my position

Contango Ore is a company that should be releasing news but isn’t.  The reason to own it is if you think that it has a promising deposit that has very good chances of turning into a mine.  In that scenario, the logical next steps for CORE are:

1. Complete a resource estimate and then a pre-feasibility study.
2. Start hiring people with mine engineering experience.
3. Start working on financing.  The company could bring in a partner that brings mining experience and some financing, e.g. seniors like Goldcorp, Agnico Eagle, Teck, etc.
4. Perform additional drilling and/or announce plans for the next exploration season.

The lack of news makes me very antsy.  Something may not be right, e.g. the company has had difficulty selling the deposit or raising capital because the deposit is a dud.

CACC Part 3: Why Credit Acceptance is brilliant

In my opinion, Credit Acceptance has excellent execution across all areas of its operations:

1. Creating value for dealerships.
2. Servicing loans efficiently and keeping costs low.
3. Learning how to underwrite well across a wide range of situations.
4. Being disciplined in underwriting.

Very few companies do all four of these things well.

CACC Part 2: The fundamentals of subprime auto financing

Originally, there was a segment of subprime auto financing that was a fairly low-risk for dealers extending credit to their customers.  If the downpayment is equal to what the dealer paid for a car, then risk management is much simpler and underwriting skill doesn’t matter much.  The dealer could lend money to even the riskiest customers.  Dealers could break even on the initial sale and hope to profit from the financing of the car.

CACC Part 1: A wonderful business buying back its shares

Credit Acceptance Corporation is a $2.7B company that finances and services subprime auto loans.  Brett A. Roberts has generated an impressive track record since becoming CEO in January 2002.  The share price, book value per share, and earnings per share (not shown) have grown at impressive rates.

The share count has dropped from 43.3M (diluted) at YE2002 to 24.0M at YE2013.  The company continues to repurchase shares through open market repurchases and tender offers, sometimes issuing debt to repurchase shares.

I’m very impressed by the way the CEO communicates with shareholders.  The company website contains the CEO’s letters to shareholders and answers to shareholder questions.  The shareholder letters explains the risks in the business, explains the CEO’s thinking on risk and underwriting quality, explains distortions caused by GAAP accounting, and helps investors to understand the business.  It is obvious that Brett Roberts is influenced by Warren Buffett in his writings.

(LMCA) Is there hidden value in TruePosition?

I’m interested in the value of TruePosition since it may be a vehicle for hiding value in the proposed Liberty Broadband spinoff.  The real story seems to be complicated.

1. The core business seems to be in decline.
2. I have my doubts about Craig Waggy, the new CEO.  He was associated with improper accounting at Gemstar-TV Guide International.  The SEC brought a civil action against him.  Waggy paid a $25k civil penalty.
3. The company has upside from patent trolling and from suing other companies for antitrust.

Kobex Minerals (CVE:KXM)

Kobex Minerals is an illiquid $23.75M company that trades for less than cash.  The shares currently trade at around $0.52/$0.54 while the company has around $0.74/share in cash.  The company is currently buying back shares.

New management has taken control of the company.  They are turning the company into an investment company.  The CEO is Philip Du Toit (29 years old) and the Chairman is Paul van Eeden.  I think highly of Paul van Eeden and think that this company is in reasonably good hands.