Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (10318)	4/12/2000 12:10:00 PM
From: Brendan O'Connor	Respond to of 78599

James: Re: CNC. I live in Indianapolis, and the Sunday Indianapolis Star three weeks ago printed an article detailing the process of insiders getting loans from the company for $millions last year to buy stock at about $40/share. The loans were co-signed by the company. When interest came due, and the "investments" were worth less than the loan value, the company gave the insiders more loans to pay the interest. When the stock price got down to about $20, the company (i.e. the managers and directors, a.k.a. insiders) decided to loan the insiders another round of $millions, again at no personal risk in the case of default, to buy another round and "lower their average cost". Now that the price is below $10, they collectively hold paper losses of over $8 million (if I'm recalling correctly)--the difference between the loan value and the stock value. (I've looked, but can't find a copy of the article on their website, www.starnews.com.) If you look at the insider trading log on Yahoo!, you'll see a list of these $millions and $millions in insider buying. To some actual and potential outside minority shareholders, this has been an encouraging sign of management and director confidence. Knowing the rest of the story, that isn't the conclusion I draw. Conseco is known for aggressive accounting, which makes it difficult for almost anyone to determine the true value of their assets. Their liabilities, includes at least five issues of preferred shares and "Financing Trusts" that I know of. One of these (symbol CNC_pf on Yahoo!) is the result of 4-5 "refinancings", i.e., shares have been bought up and replaced with the proceeds from another preferred stock issue, in the past 10 years. In other words, they use very complicated methods to finance their business, which makes it difficult for almost anyone to determine their true liabilities. By the way, these preferred stocks and "Financing Trusts" currently pay dividends ranging from 16.6% to 29.1%. It doesn't look to me like Mr. Market thinks these coupons are very predictable. In summary, management consistently misrepresents to their partners (the shareholders) the true value of the company's assets and liabilities, and has borrowed $millions from their partners, with the deal being that if the price goes up, management gets very rich, and if the price goes down, their partners (the shareholders) will cover all their losses. (They tell the outside minority shareholders this is good because owning a lot of stock aligns management's interests with shareholders' interests.) I've been watching this situation for entertainment and education, and because it is a company people around here have always perceived as great local success story. I never claimed to understand their business and so never invested in it. I also have seen TV interviews with the CEO Hilbert. Just my opinion, of course, but I would estimate that he takes over 95% of his business advice from philosophical followers of Niccolo Machiavelli, and less than 5% from philosophical followers of Warren Buffett. I don't think I'd trust these guys with the job of mowing my lawn, much less with the job of running any type of business I owned. I personally wouldn't buy a piece of this company at any price, because I have zero confidence that anyone, including management (people who live on perceptions don't spend much time looking at reality), has any idea whether its value is above or below $zero. Just My Opinion, Brendan