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Defining the downside: Follow up from fundamental update #3424. Since the NAV component of SFE excluding ICGE has been in a range of $26 to $30 for months, it is relatively safe to assume that this component will continue to be stable for some time- barring a market meltdown AKA an Occtober accident. That leaves ICGE. What if [purely hypothetical, not a prediction] ICGE gets cut in half. Quite obviously, a $100 current investment in ICGEwould go to $50K. What would such an event do to SFEs price? It would cut the NAV [using Larry Greensteins mid-Fri.# of $72.50 to $51.70. Would SFE go to $51.70 or trade at a discount or premium to that? I would suggest that SFE would trade at a premium. There is no reason to think otherwise-as recent history suggests as much. When SFE had a NAV of around $50 a few weeks ago, it was trading at a $5-$7 premium or around $55 to $57. There would actually be more reason to trade at a premium than was the case a few weeks ago, as SFE would be much closer to the next 2 DSSP offerings scheduled this year. There would be little reason to discount ICGEs value to SFE [which I believe to be the current case as outlined in # 3424], because if ICGE got cut in half, obviously it would remove a great deal of risk [much more than half, as ICGE isn't going to zero, far from it] to current SFE shareholders, and would provide a dramatic change in the risk/reward ratio. Summary, I think many times these past few years, investors pay undue attention to the upside, without fully considering the downside. They think offense without paying enough attention to defense. What is the current risk to current buyers/holders of SFE if "things don't work out"? The biggest risk to SFEs price is ICGEs performance. Using an extreme downside of 50% to ICGE, what would it mean to SFEs price. If the above analysis is correct, the downside would be contained at around $55 to $57 on SFE. While a current $100K investment in ICGE would go to $50K, a $100K investment in SFE would go to between $81K to $84K, with good recovery prospects considering the succession of offerings coming shortly and the interest and value they would create. Now possibly ICGE will continue marching up from here, and SFE will be dragged reluctantly up with it [was the case last week], but it is good to consider the What If?, that may be of concern to SFE holders/buyers. Disclaimer, the above is opinion only about a subject that is highly complex and in constant flux. One should do their own due diligence. If fall ushers in the big Kahuna, all bets are off, as it would not only impact ICGE, but also SFEs "other"NAV companies, and possibly coincide with a discount to NAV, despite a depressed NAV. Should that occur we might be looking at a $41 total NAV and an upper $30s SFE. That is the ultimate "What If" Fortunately, it is also not the likely scenario. thanks, Mike |
