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Merion Road Capital: “Fidelity National Financial (FNF) is Likely Over-Earning Right Now”

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Jose Karlo Mari Tottoc
·5 min read
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Merion Road Capital Management, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 2.5% was reported by the fund's Long Only Large Cap Fund, while its Long Short Small Cap Fund delivered a 23.8% in the first quarter of 2021, outperforming its Russell 2000 and Barclay Hedge Fund benchmarks that had a 12.9% and 4.9% gains respectively in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Merion Road Capital Management, in their Q1 2021 investor letter, mentioned Fidelity National Financial, Inc. (NYSE: FNF) and shared their insights on the company. Fidelity National Financial, Inc. is a Jacksonville, Florida-based title insurance company that currently has a $12.7 billion market capitalization. Since the beginning of the year, FNF delivered an 11.69% return, impressively extending its 12-month gains to 51.28%. As of April 09, 2021, the stock closed at $43.66 per share.

Here is what Merion Road Capital Management has to say about Fidelity National Financial, Inc. in their Q4 2020 investor letter:

"During the period I added to our position in Fidelity National Financial (“FNF”). FNF is the nation’s largest title insurer with 33% market share. It was built over the last 30 years by Bill Foley, who revolutionized the industry with his emphasis on eliminating bureaucracy, utilizing technology to streamline operations, and maximizing customer service. He is well-regarded as a savvy investor and consummate deal-maker having acquired and divested multiple entities both in title and ancillary fields. He continues to serve as the chairman of FNF with a personal stake in the company worth hundreds of millions.

While title insurance is technically insurance, it is a bit of a unique animal. Being that the insurer writes a policy based on past events, not unknowns in the future, losses are relatively small and predictable. The more data an insurer can analyze, the less likely they are to experience a claim; and the more efficiently they can analyze the data and process the application, the lower their costs will be. FNF has invested in automating its work stream through their ownership of NextAce (automated search), SoftPro (document production and closing), and multiple other cloud-based platforms. Due to these investments, FNF boasts industry leading margins and is able to attract more third party agents who can leverage their service offering.

Last year FNF acquired the outstanding interest in FGL Holdings (“F&G”), a fixed indexed and fixed rate annuity provider. Though this appears to be a financial rather than strategic acquisition, there should be some opportunities to grow the combined business. Notably, the acquisition afforded F&G an improved credit profile which has led to ratings upgrades. These upgrades allow F&G to address new distribution lines, such as in the bank market where FNF has strong relationships through their title and escrow business. The company announced that since launching in July 1st it had already achieved $500mm of sales in this channel (vs. full year sales of ~$4bn).

FNF is likely over-earning right now based on the recent spike in mortgage activity. Looking out to 2022 I estimate that earnings should step down to something a little shy of $5.00/sh. At current prices we are collecting a double digit earnings yield for a business with strong market positioning and a superb capital allocator. Last year they repurchased a bunch of stock in Q1 at depressed prices and have announced their intent to acquire another $500mm over the next 12 months."

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Our calculations show that Fidelity National Financial, Inc. (NYSE: FNF) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Fidelity National Financial, Inc. was in 68 hedge fund portfolios, compared to 74 funds in the third quarter. FNF delivered an 11.86% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.