What do water rights, old railroad land, insurance companies in "run off," and Swiss energy and transport companies have in common? These disparate assets comprise the bulk of PICO Holdings (NASDAQ:PICO), a company whose simply stated goal is "to achieve a superior return on net assets over the long term." Investors might be interested to know that PICO is run by two self-identified devotees of "Graham and Dodd" value investing.
PICO turned in financial results for the fourth quarter and full fiscal year on Monday morning. The company earned $29.2 million for the year, on an average shareholder's equity value of about $368 million (here the value for each quarter was added up and divided by 4), resulting in a 7.9% return on equity. That's somewhat shy of the company's reported 12.4% growth in book value per share, which slowed somewhat from 16.9% in 2005. Judging by these numbers, this wasn't a bonanza year like that experienced by, say, Markel (NYSE:MKL), an insurance holding company that grew its book value by 32% in 2006. To be fair, Markel was coming off of a terrible hurricane year and 2006 offered dreamy pricing for insurers willing to bet against the likelihood of a Katrina repeat.
PICO gets a free pass for now, because it experienced no such alignment of the stars. Putting aside the imperfect comparison to Markel, it's important to recognize that PICO's earnings are just about as lumpy as earnings can get. While near-term results give us a rough sketch of the firm's performance, it's the long-run compounded return that matters here.
PICO's various operating businesses -- described in great detail in the company's 10-K, also released today -- appear to be performing extremely well. Vidler Water is securing water rights out West and cutting lucrative supply deals with local governments and developers. Nevada Land continues to seek the highest and best use for its landholdings. Physicians and Citation, the two insurance companies in "run off" mode -- that is, fulfilling historical policies but not writing any new ones -- are using their slowly dwindling float to invest in undervalued securities. For 2006, the equity portion of these insurers' investment portfolios returned 14%, which is significantly down from the 40%+ returns seen in the two previous years. But hey, not every year can be a barnburner for small-cap value stocks. This performance is still nothing to sneeze at; even the master S&P-tamer Bill Miller had difficulties trying to beat the market in 2006.
Institutional investors just started catching on to the PICO story in 2006, seemingly above all as a "water play" through its Vidler subsidiary. A sizeable placement of shares occurred last May, which was recently echoed on March 1 by another private placement, this time at a well-below-market price. That was enough to seriously rattle investors during an already panicky week. PICO is now trading well off its February high, even after yesterday's earnings bounce. It seems as good a time as any to start acquainting yourself with this bargain hunter. Trading at over 1.6 times book value, this stock is not itself a clear value at present, but hold it in your sights. Some day this hunter may just become a value investor's quarry.
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Fool contributor Toby Shute has never gone hunting, but he is an NRA-certified sharpshooter. (He was as a child, anyway.) He kindly requests your feedback. The Motley Fool has a valuable disclosure policy.
