Sand Spring Advisors LLC
Two Very Different Pictures
January 16, 2002
by, Barclay T. Leib
Remember the old joke you heard as a kid:
"What's the difference between a woman in church and a woman in the bathtub?"While apologizing to all of our female readers for such crudeness, today we would like to ask: What is the difference between the two companies pictured below -- the first of American International Group (AIG), and the latter of Stillwater Mining (SWC)?
"The woman in church has hope in her soul,
while the woman in the bathtub has soap in her hole."
The first, AIG, has always of course been know for its driven and innovative management that historically has aggressively taken advantage of every small tax gimmick and regulatory wrinkle in the asset management and derivatives trading world. Among other claims to fame, AIG is a master issuer of so-called "total return swaps" -- off-balance sheet derivatives that help customers get around everything from Regulation T, to IRS constructive sale rules, to insider lock-up provisions, to pension fund leverage constraints. And for such aggressive management and innovation, the market has historically rewarded AIG with an aggressive price-earnings ratio -- one that currently stands at 37-1.
Conversely, the second stock of Stillwater has had absolutely horrific management. Although Stillwater is the only major North American producer of palladium and has substantive in-ground reserves at its Montana mine, and even though the palladium price is at a lofty $420 per ounce (down from over $1000 an ounce, to be sure, but still pretty damn high), Stillwater recently had a "liquidity crisis." It specifically had to re-negotiate certain loans with its creditors in order to avoid a major cash-flow shortfall. The stock is thus largely unchanged after a 7-year bull market in the underlying metal that it produces, the market currently giving Stillwater a P/E close to 7-1.
But driven in part by the Enron debacle, the rules of the game are changing. Creative accounting and gimmickry are on the way out, while actual assets both on and in the ground are returning to be in more demand.
As the equity market weakens here in the short term, we think people will look around and ask, "Where else has the use of derivatives instruments been so nifty and complicated as it was at Enron? AIG might easily be one financial firm that could take it between the eyes in answer to that question. Meanwhile, Stillwater will likely remain under a bit of pressure in the short term on perceptions that a weakening economy will continue to compress demand for automobile catalytic converters (palladium's primary use). Longer-term however, SWC is a stock that is dirt cheap relative to its assets in the ground.
If our Fibonacci extrapolation of the rhythm of both stocks proves correct, AIG is now due for a tumble toward $44.72, while at some point down the road Stillwater should sport a huge advance toward an eventual objective near $54.90.
Please forgive the somewhat forced anology but: The holier-than-thou insurance company with a high credit rating and aggressive management may have been the woman in church with "hope in her soul" to date, but the better investment at this point is the poorly managed enterprise that has had the "soap in its hole."
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