I'm on the hunt for companies that won't end up on the public welfare rolls as part of this massive $700 billion bailout measure. That's why I own shares in PICO Holdings. Just read this straight talk from PICO's CEO John Hart on the company's latest quarterly earnings release: "In an environment where many have learned the downside of excessive leverage in an attempt to maximize short-term earnings, and are now looking to the federal government, sovereign wealth funds, and their own shareholders to bail them out, we continue to manage the company and our assets conservatively."
Love it! Besides the refreshing forthrightness of its management, PICO also sports a robust balance sheet, owns some seriously valuable assets, and has a proven track record of sound investing. Good stuff. But right now, that "no bailout" thing is numero uno on my list.
Dilution. As we've already seen with the conservatorship of Fannie Mae (NYSE: FNM ) and Freddie Mac, and the $85 billion lifeline to AIG (NYSE: AIG ) , companies that get tangled up in the government's purse strings can certainly survive, but they usually leave next to nothing for shareholders. Combined, these three companies have already destroyed nearly $300 billion in shareholder wealth since the credit troubles began.
And let's not leave Goldman Sachs (NYSE: GS ) out of this depressing picture. The financial infusion from Warren Buffett may not be a bailout, but the deal -- calling for Goldman to fork over 10% in interest on new preferred shares -- is pretty costly. Moreover, Buffett also gets warrants to buy Goldman stock at a price that will probably be much lower than the market price at the time he exercises. That will mean serious dilution for Goldman shareholders down the road. And besides, would you ever really want to be on the opposite side of a deal with Buffett?
Companies not taking their spot in the corporate-welfare line won't be forced to sell huge stakes to the government at fire-sale prices, issue new shares, or take on costly, prohibitive debt -- all of which can cost shareholders dearly. With PICO, I've got an ultra-clean balance sheet -- free and clear of subprime-mortgage securities -- with lots of cash and hardly any debt.
Reputation. Back to Buffett: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."
You can bet that executives at AIG, Lehman Brothers, and Washington Mutual wish they'd done things "differently." After all, these were revered institutions, built over many decades to become some of the world's largest and most powerful financial institutions. Yet because of excessive risk-taking, too much leverage, and, yes, greed, they were destroyed in less than a year.
A company's reputation, particularly in the financial-services industry, is paramount for getting deals and maintaining trust with partners and customers. Without it, you might as well close up shop.
Taking advantage of the situation. My No. 1 reason for loving companies that aren't in need of a bailout: While AIG and Citigroup (NYSE: C ) spend valuable time deleveraging their debt-choked balance sheets, companies like PICO are taking advantage of the situation and buying up assets and securities on the cheap. Back to PICO: "We are capitalizing on the slowdown in the real estate market, and particularly on the financial challenges facing developers and builders in select locations in central California, by continuing to build our new business, Union Community Partners."
You read that right: In what can only be described as an atrocious real estate market, PICO has gotten busy. Specially, PICO's been buying up lots in California -- more than 1,200 so far. At the bargain-basement prices PICO is probably getting, just imagine the rewards once the real estate market turns around! But PICO wouldn't be in a position to make that type of move if it were winding down its business and selling off assets to appease creditors.
Thanks, but we'll pass
Here are a few other solid financial companies that are saying "thanks but no, thanks" to any government handouts while taking full advantage of the depressed market conditions:
Charles Schwab (Nasdaq: SCHW )
- Dilution: None.
- Reputation: High-quality franchise; customers love talking to Chuck!
- Taking advantage: While competitors such as E*Trade teeter, Schwab's diverse portfolio of business posted a 22% increase in profit in its latest quarter. Moreover, while banks and mortgage lenders drastically cut business over the past year, Schwab has grown its conservative book of mortgage and home-equity loans by 76% over the past year.
Markel (NYSE: MKL )
- Dilution: None; buying back shares.
- Reputation: Conservatively run insurance outfit that has delivered compound annual growth in book value of 18% over the past five years.
- Taking advantage: Chief investment officer is using his company's "dry powder" to buy quality companies for Markel's insurance portfolio on the cheap.
Wells Fargo (NYSE: WFC )
- Dilution: None so far, but probably will have some associated with the Wachovia deal.
- Reputation: Berkshire Hathaway owns 9%. Enough said.
- Taking advantage: Wells Fargo trumped Citigroup's bid for Wachovia with one of its own -- one that doesn't require government assistance or FDIC insurance. The move will greatly expand the bank's business on the East Coast. Says Wells Fargo Chairman Dick Kovacevich: "Given the financial conditions today, I feel like a kid in a candy store."
The Foolish bottom line
Look, this massive $700 billion government bailout might help, but it certainly won't be the final answer to all of our economic and market ills. And companies that look as if they might get some relief from the bailout probably aren't companies you want to be investing in anyway. Instead, buy companies that aren't looking for a bailout in the first place. These companies have the balance sheets, the reputations, and the opportunistic management teams necessary to take actions now that will pay huge investment rewards down the road.
Our Motley Fool Stock Advisor service has a whole slew of companies that aren't in the business of government handouts. In fact, since inception in 2002, our bailout-shy companies have racked up average returns of 21% compared to negative 10% for the S&P 500. You can take a free trial today and get instant access to all of our best ideas for new money -- just click here to get started.
Matthew Argersinger owns shares of Markel and PICO Holdings. Charles Schwab and Berkshire are Motley Fool Stock Advisor recommendations. Markel and Berkshire are Inside Value selections. The Fool owns shares of Berkshire Hathaway, and its disclosure policy does not need a bailout.