I don’t normally expect to look at very large companies. There are many investment analysts who research the market’s biggest companies and who publish their reports for the largest and most sophisticated (institutional) investors. These companies could be bought without additional research by me. But this is a case of a contrarian idea.
Manulife recently reported a large loss. This came as a surprise to the market, which expected only a small loss. The loss was due to an accounting rule called “mark-to-market.” There is good reason for companies to follow this rule, because it accurately reflects the value of their marketable securities and, in the case of Manulife, the potential cost of the guarantees they have issued on stock market-based investments, if everything were to be liquidated today. However, everything is not being liquidated and, as Manulife’s CEO pointed out, if they had been following American accounting rules, they would have posted a significant profit.
Analysts seem uncomfortable with the fact that Manulife has not hedged their stock market exposure. I find this ironic because Manulife is an insurance company. Why should they hedge their risk by selling it to others (a form of insurance), when they are an insurance company with some expertise in that area? They have chosen to self-insure with the result that their earnings are volatile, but their costs are reduced.
Manulife’s shares used to trade well over $30. In the credit crisis, they issued new shares, diluting existing shareholders. A fair value is probably around $20 (Morningstar puts it at $18, unchanged from prior to the recent earnings announcement), well above the current price of $12.73 (August 13, 2010 close). Chances are that as the stock market recovers, Manulife’s stock price AND earnings will both recover proportionately. Buying this stock is similar to a leveraged bet that the stock market will rise.