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3 Financials for a First-Rate Portfolio

Monday - 5/13/2013, 3:46pm  ET

The Value Investing Congress headed by Whitney Tilson just wrapped up in Vegas. While not as ballyhooed as the Ira Sohn and the Salt conferences, value investors eagerly anticipate its new long and short ideas. This time around there were three financials highlighted as long ideas.

First Citizens Bancshares  was presented by Chris Mayer. Title insurers First American Financial and Fidelity National Financial were presented by Zeke Ashton. The common denominator was the thesis that investors are still wary of financials but shouldn't be. And you have three size market caps to choose from.

A first-rate family business

Chris Mayer, of the Capital & Crisis Newsletter, presented on the advantages of owner-operator companies and likes First Citizens Bancshares for its 33% family ownership. After Bank of Oklahoma it is the second biggest family-owned bank in the US.

The bank bought back $92 million worth of shares from a member of the Holding family in December and still has a larger share buyback program in place to retire 1% of shares outstanding. Since Robert Holding, a bank teller, rose to become President in the 1930s the company has been under the control of the low-profile Holdings and descendent Frank Holding Jr. is CEO. The company was founded in 1898.

The company has extended its reach from Raleigh, North Carolina by purchasing six failed banks in recent years with 414 branches extending to the Pacific Northwest although it remains concentrated in the Mid-Atlantic. It faces tough competition in this affluent area that could almost be said to have a surfeit of banks including the big dogs Bank of America, BB&T, and Wells Fargo. But it is a conservatively run bank and didn't accept government aid during the financial crisis. It also loaned mainly to affluent customers who could qualify for its wealth management offerings.

Fist Citizen is still a small-cap for now at an $1.8 billion market cap but it trades under book value and at a 14.47 trailing P/E with a .60% yield. The stock is only up 10.6% over the last year and hasn't been able to break over $200 with its 52 week high on May 6 at $192.60.

A first rate play on housing

Zeke Ashton of Centaur Capital Partners, while by no means a fan of homebuilders, likes title insurers as the way to play the housing resurgence, instead. And he likes First American Financial, a California title and specialty insurer which also offers banking, trust and advisory services.

This name is trading over book value but has risen 55.83% over the last year. It has a 1.90% yield at a 14% payout ratio. It is trading at a trailing 9.58 P/E.

The company reported Q1 earnings per share of $0.33 on April 25 and CEO Dennis Gilmore highlighted they closed 12% more resale orders and revenue per each resale order was up 11% with higher home sale prices. Combined this helped raise total revenues 19% to $1.15 billion beating analysts' estimates of $1.08 billion. Gilmore was bullish on the spring selling season already underway with refinance volumes of 3,300 orders daily for an increase of 21% year over year.

Also in its favor the mid-cap company ($2.89 billion market cap) was named to the Forbes list of 100 Most Trustworthy Companies in America. The 120 year old company is a title services provider globally; it was the first title insurance provider in Mexico, Korea, and Hong Kong and has leading market share in the UK and Australia. In 2010 it spun off its analytics division to become CoreLogic.

It's lightly covered with only four analysts and analysts see a 6% decline in growth. This seems to contradict CEO Gilmore's bullishness as he said on the call the housing recovery is still in its early stages and getting better all the time. That said, title insurers may be a better way to play housing than the builders.

A baby Berkshire Hathaway

Ashton also likes Fidelity National Financial. This company has virtually the same business model, title insurance and mortgage services as First American but with a significant twist. This company is also involved in original and after-market electrical components for vehicles. They also own and operate US restaurants: O'Charley's, Ninety Nine Restaurants, Max & Erma's, Village Inn, Bakers Square, and Stoney River Legendary Steaks. What?! A motley collection of businesses for a title insurer.

The restaurants division is part of their 55% stake in American Blue Ribbon Holdings which operates 650 restaurants in the US under the aforementioned brands. The Stoney River Legendary Steaks restaurants are part of their 87% stake in J. Alexanders LLC, a high end chain concept. The auto parts division is thanks to a 50.2% stake in Remy International which generates $1.2 billion in annual revenue. Fidelity National also has a 33% stake in Ceridian Corporation, a business services and payroll management company.

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