Manulife Financial (MFC.TO)

It's been hammered because of this lawsuit and report by a short-seller. Normally this would be a buy based on valuation. There's a tiny chance that MFC will lose this case. That said, he'll wait for the decision before buying this. The judgement may pass in late-2018 or early-2019.

It's a little scary because it involves a lawsuit, which MFC considers unfounded. Anything can happen at a trial. But he feels that case law and common sense clearly support MFC. The good news it that they will clear their shorts. The lawsuit and short report have hid the fact that MFC has been showing better consistency. He see 9% share and dividend growth trading 7.2x earnings. If you own a lot of this, don't add to be safe. If you don't, yes you can buy it. He believes Manulife will clear this hurdle.

MFC has often been his top pick. For lifecos operating in the U.S. there are accouting issues between Canada and America in how they account for reserves. There is embedded value in MFC's long-term care assets that aren't reflected in the stock price. Now is a buying opportunity. He expects their next report to be fine.

Sometimes people run for cover when there's a short-seller. In this case, the short-seller has picked up on a lawsuit over a 20-year-old insurance policy which he thinks doesn't have merit. The market has sold first and asked questions
later. After the pullback, the stock has regained 15% and has created a great entry point now. Trading at 1x book value, deeply discounted. 12% ROE, so profitability is solid. Geographically diverse between Canada-U.S.-Asia. Their
welath and asset management division is their golden child, growing nicely. The only weakness is their US legacy business, but they're cleaning it up. The stock should be much higher. (4.36% dividend, Analysts Price Target $29.59)

It's hard making money owning it. He's not sure why Canadians keep banging their head buying MFC, when you can buy the Canadian banks. He has no specific criticism about MFC, and in fact MFC is doing a lot of things right, like
moving more into wealth management and performing well in Asia, while diversifying away from insurance. But there's a disconnect in what they're doing and the share price, which has been ongoing.

They are the current target for Muddy Waters. They currently switch to Sun Life Financial Inc (SLF-T). They did it more for a product that they offer called Long-Term Care and as people are living longer lives, reserves have to be higher. They still have a significant exposure to this.

He has not followed it closely. Muddy Waters put a short on it. There was a problem in the way they wrote insurance policies in the '90s. He wishes he had bought way back when it was $10. There is tax loss season and you might buy it there. It is a good company.

It is incredibly cheap and has been looking at it the last few weeks. There was a short report out this week saying that there was this legacy litigation issue that was not properly disclosed. The bigger problem for them is they have a number of legacy businesses that are lower return on equity that they have to rotate out of. Nothing fundamentally wrong with it.

He has long owned this. He expects good Asian earnings and that they will hike the dividend. Even the short-seller Muddy Waters says the court case (that they've written about) is a binary issue and MW could lose in the end. MFC has been doing this a long time, and hopes the management will pull through.

Muddy Waters has beaten us up before, but when the short report came out, he sold MFC and bought SLF-T instead. He doesn't know if MFC will win or lose this case. Until then, Muddy Waters has put a cloud over this stock. Also, the
court case could get appealed and drag on.

(A Top Pick October 5/17 Down 17%) This was his pick for a rising interest rate environment. A lawsuit is pending to allow an investor to allow unlimited funds into an income investment, which would create severe losses and impact the balance sheet. So far the company is ignoring the investor suit. He interviewed management recently and they intend to vigorously defend their position. He is going to stick with it.

8.5 times PE with 8% growth in earnings next year. In a rising interest rate environment these companies tend to do well. He has not owned it in 4 years and does not own it.

Short-seller Muddy Waters is about a specific legal case in progress. Strong franchise in Asia, but what's hurting them is their John Hancock franchise in the U.S. with a low ROE. Have a strong asset management business. MFC must deal with Hancock--can't sell it but must improve ROE. Management is slowly doing that. Now is a good buying opportunity with a good yield. Could take time.

She has no more info about the Muddy Waters short report. Muddy is betting on the outcome of this trial. See what happens. It could drag on for years with appeals. She likes the new CEO who has segmented their legacy products, and likes their positioning in China. It's now trading close to book value.

The short is questionable, but he’s been right in the past. He’s never been enthusiastic on the name, as they always come up with unpleasant surprises, so he’s always gone with Sun Life. Rising interest rates will be positive, but the transition periods are always tricky.