Argo Group, a small alternative asset manager trading in London on the AIM market, is one of the first stocks I wrote about when I started this blog. I bought the company in the first days of 2012 and owning this stock has been a frustrating experience ever since. Thanks to a good 2016 I’m now basically back at my starting point. I bought the stock at 14.69p/share and today it trades at almost the same price at 15.37p/share. I did get two 1.3p/share dividends in the meantime for a total return of 22.3%. Pretty pathetic for a more than five year holding period in one of the biggest bull markets in human history!

While 2016 was a good year it seems that for now the business will continue to muddle through. In the 2016 annual report to company acknowledges once again that they don’t have sufficient assets under management to be profitable without earning performance fees (and this year even with some performance fees the operating profit was negative). But a plan to liquidate the company is absolutely not on the table: they are looking for an accretive acquisition and working on increasing AUM (something they write about for years, but are so far never able to do).

So why am I continuing to hold this stock? Simple: it was very cheap and it is still very cheap. The stock is now trading at a discount of 53.7% to net current asset value, and that’s huge! And it’s not like they are hemorrhaging cash. Last year they had a small operating profit, and this year a small operating loss. While the discount alone is enough of a reason to own Argo they also have an off balance sheet asset that could be quite valuable. Argo has a bad debt provision of US$6.4 million for management fees receivable from the AREOF real estate fund. This fund has a negative equity position, but according to Argo’s management these debts are expected to be fully recoverable: except that the timing of the payments is uncertain and unknown. I’m not exactly that optimistic, but last year the fund managed to pay back US$2.8 million, so there might be some truth there. Given that the book value of Argo is just US$20 million the bad debt provision could be pretty significant.

When you look at the historical financials below it’s also clear why the stock price hasn’t done much the past five year. After some bad news in 2014 and 2015 tangible equity/share is now basically back at the same level as five years ago:

So for now I will hold this stock patiently, but I’m not yet sure how long I should continue to do so. I have owned this now for more than five years, and I can’t wait forever… at the same time: if I would encounter this stock today for the first time I think I would still hapily buy it, so why not continue to hold it?

Disclosure

Author is long Argo Group