Stocks: Hurricane Play- Heritage Insurance (HRTG)

[Recyclersteve]

This thread is about an insurance company called Heritage Insurance (Ticker: HRTG), but before I get down to business my thoughts and prayers go out to those affected by Hurricane Milton and also those in NC and elsewhere affected by Hurricane Helene. I have a very dear friend in FL who is likely getting hit pretty hard as I write this. God bless you John!

As a stock trader you never really know in advance when something will come out of the blue and evolve from a big zero into a remarkable trade. Here is (potentially anyway) one such scenario.

I spent hours on Wednesday researching over 50 insurance companies. I was looking for something overvalued which had high potential exposure for homes and autos damaged by a hurricane. So I ruled out companies like Met Life, which is basically life insurance and nothing (at least of material size) in the Property & Casualty space. I took an insurance class back in my college days and 12 hours of accounting (4 classes), so I know something about the insurance business and fair valuations for companies.

I also wanted a stock under $100 a share. I've just had better luck in general with stocks from, say, $6-7 a share up to around $99 a share. That's my personal opinion from many thousands of trades, not something I can absolutely prove with tons of data. This criterion alone weeded out quite a few insurance companies. I also weeded out companies not based in the U.S., even if they are traded here.

I was hoping to find 1-3 stocks that jumped out. Only 1 really did- Heritage (HRTG), which closed Wednesday at $9.65 a share.

I shorted Heritage in after hours Wednesday, so I am betting on it going DOWN, not up. AFTER I shorted it, I saw where someone online mentioned a story done by 60 Minutes. I did a bit of research and found that the 9/29/24 episode had Heritage in their very first story. Fantastic- you don't have to watch the whole show!

The story mentioned the claims from Hurricane Ian in September, 2022 (over 2 years ago) that still haven't been fully settled. They interview an independent adjuster who showed his face on national TV and they gave his full name. That took guts! Hats off to the man, no matter how much he was paid.

The adjuster appeared VERY CREDIBLE in my humble opinion and showed claims (a few dozen I think) where his claim figure used was reduced by 80-90% and even one reduced by about 99%. The company even refused to pay for new roofs- they said the roof had to be repaired instead of being replaced. What the????

Someone in the episode said that most people just accepted the tiny amounts they were awarded and didn't have the resources to hire lawyers to contest the amounts. This is very sad!

Oh year- another biggie. HRTG was the ONLY INSURANCE COMPANY mentioned by name in the episode. Wow!

After seeing this my blood boiled and I was also really happy at the same time that I had shorted the very same stock based on my own unbiased research. Again, I didn't know about the 60 Minutes story when I shorted the stock.

In fairness to HRTG, I recommend going to their Investor Relations site to see their written response about the 60 Minutes show. I read it carefully and even wrote the company about a mistake in the math in their public communication. (They cited 10,000 random insurance claims and quoted numbers for those left as is or adjusted up or down. Unfortunately for them, the numbers didn't add up to 10,000. Ouch!)

Now, if you've never shorted a stock before, please realize that you have an unlimited potential loss on your hands when you sell short. If you buy a $10 stock and it goes to zero, you lose $10. But, if you short a $10 stock and it goes to $50, you are down a whopping $40 instead of just $10. I don't want you to be overly terrified about shorting because there are legitimate times to consider doing so. I'm prepared just in case the stock goes up instead of down. I didn't bet the ranch on this one and have more buying power to short more or do a bearish options trade in case I can't borrow more shares to short. Also, sometimes you have to pay a fee to short a stock. I didn't have to pay a dime to short this one yesterday.

One other thing about shorting- it can only be done in a margin account. So if you only have retirement and cash accounts, you are stuck. You might be able to find a bearish options trade, but that is a whole different (and quite complicated) subject.

So please tread carefully if you do want to short this stock. If you aren't experienced at shorting or don't have decent financial resources, you might start small by shorting perhaps 10 to maybe 100 shares. That way you might gain some valuable experience you can hopefully use for many years.

By the way, HRTG stock went down to $1.12 during 11/22 (shortly after Ian). With the added attention by 60 Minutes, I wouldn't be surprised to see it get hit hard again. No guarantees of course- this is just my guesstimate. Keep in mind- this is a small $300 million insurance company, so a few rich individuals or hedge funds who love or hate the stock could really move it around quite a bit. I'm basically betting that when people actually watch the 60 Minutes piece, there will be many more who are disgusted with what has happened. Even if they personally don't have a way to short it, they may tell someone else who can.

This market overall is very richly valued right now. Warren Buffett's company even has roughly $300 BILLION in cash right now. I have a tremendous amount of respect for Buffett. There are those who think that if a certain person becomes President, the market could sell off sharply. If you are betting every one of your stocks will go up and you have no exposure to shorting, this might be a good time to learn a bit more about doing so and thereby better diversifying your portfolio.

Good luck to all. I'm interested in hearing any thoughts or comments that everyone has.

[Robarons]

Looks like 9/30/24 it had a big drop from $15 to $12.50 to our price today of $10.63 after bouncing off $9.30's few days ago.

Seems like it was already sold off before the storm- looks like even the first storm.

With an RSI of 36 and the MACD recovering what was your goal on the short- at the price you shorted at (lets assume it did not go up). Was a quick drop to $7 or something similar or just a outright bust- like $1-5.

Appears there was minor borrow fee of 1.4% but dont quote me on that.

If I want to short something my preference is just to buy an ITM put- like you can grab a $20 March 2025 at the money

Thanks for reading

[Recyclersteve]

Looks like 9/30/24 it had a big drop from $15 to $12.50 to our price today of $10.63 after bouncing off $9.30's few days ago.

Seems like it was already sold off before the storm- looks like even the first storm.

With an RSI of 36 and the MACD recovering what was your goal on the short- at the price you shorted at (lets assume it did not go up). Was a quick drop to $7 or something similar or just a outright bust- like $1-5.

Appears there was minor borrow fee of 1.4% but dont quote me on that.

If I want to short something my preference is just to buy an ITM put- like you can grab a $20 March 2025 at the money

Thanks for reading

HRTG sold off sharply the day after the 9/29/24- 60 Minutes piece.

It sold off again two days before Milton hit as the storm was intensifying.

I'd highly recommend watching the 60 Minutes piece- I've seen it at least 3 times now and have taken lots of notes. Also, there was an article written on Seeking Alpha about HRTG. It is titled "Heritage Insurance: The 24 Hours That Changed Everything". It was written by Bashar Issa, whom I don't know, but I was impressed with the quality and depth of the article. It wasn't your typical ra ra piece.

It's hard to explain my goal as that changes constantly with the market. If I could have made a quick $1,000 the first day, I'd have likely taken that. I expect to eventually make much more than just $1,000, but will likely be in and out of this stock several times- perhaps even over the next year or two. I haven't been charged a fee to borrow yet by Schwab, but would gladly pay anything under 10%/year without a hitch. It's when the fees his 200-300% (like GameStop and a few others) that the fees can really add up.

I haven't looked closely at the options yet. I keep trying to look when the market is closed and it is difficult to tell the spreads between bid and ask then. In general, if the premiums are sky high, I'd rather sell options than buy them. If they are dirt cheap, I'd rather buy than sell. In this case, since I'm bearish on the stock, I'd likely sell naked call options.

Also, the open interest on March $20 puts is only 25 contracts total, which is tiny. If a single person wants to do, say 20-50 contracts, I wonder what happens when they come up for expiration and the spreads get super wide (maybe partially because the market maker knows they have you over a barrel?). I'd have to study this more closely. I generally want more liquidity that what is available here right now.

Another factor to watch closely is earnings, which are expected between October 31 and November 4. Also, earnings for most insurance companies are before market open. I do expect some kind of relief rally when people realize that Milton wasn't nearly as bad as expected.

I just don't trust that they will have legitimately good earnings. Consider this. Here are the P/E ratios for major insurance companies along with Heritage:

ALL 17
PGR 21
CB 12
KMPR 77 (outlier- maybe they had lots of storm claims?)
TRV 14
AIG 14
HRTG 5 (another outlier- -probably because they are likely lowballing people on their claims- see the 60 Minutes piece for much more on this)

So HRTG's P/E of 5 is way, way lower than these 6 other insurers. I can't imagine that in Florida they run that much more profitable of a business. I wonder if they will issue an earnings warning before announcing their official earnings. Hard to say, but I think probably small companies don't do that very often.

Another little tidbit- I like to have orders to close out my stocks (long or short) generally be Good Til Cancelled (up to 180 days at Schwab- it used to be just 60 days) AND ALSO valid in Extended Hours. There are times when real opportunities arise in the early hours and after hours. Yes, I run the risk that I may not see a news article that came out when I was sleeping, but I'm willing to take that chance.

Good luck Robarons!