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The mysterious case of Kingsway's 130% stock bounce

On Sept. 12, things didn't look so hot for Kingsway Financial Services, a Toronto property and casualty insurer, as its shares hit a 52-week low.

One month and 21 trading days later, the company's shares are up about 130 per cent, and it's hit a new 52-week high.

What happened? Well, it's not entirely clear. On Sept. 17, the company announced a restructuring that CEO Larry Swets said would "create the foundation for returning our insurance underwriting operations to profitability." The restructuring involved the hiring of a former GE Reinsurance Corp. executive and also, charges of $11.4-million (U.S.), or 87 cents per share.

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Indeed, it's hard to value Kingsway by any earnings-based metrics, since it last posted positive net income in 2006, and last reported positive EBITDA, or earnings before interest, taxes, depreciation and amortization. in 2008. Operating cash flow has been negative since 2008.

The shares were up 14 per cent, to $2.03 (Canadian), on heavy volume the first trading day after Kingsway announced the restructuring plan. But there was no one-day bounce: The shares simply kept going, nearly doubling since, on unusual volume.

The average number of Kingsway shares traded each day since Sept. 1, both on the TSX and NYSE, has been five times the average daily volume for the 11 months prior.

Kingsway disclosed Oct. 3 that the New York Stock Exchange contacted it "about the unusual trading volume of its shares." And, despite the press release's title of "Kingsway Addresses Unusual Trading Volume," the company did not address it, saying "Kingsway reiterates its policy not to comment on unusual market activity or rumours and speculation in the marketplace."

Perhaps the restructuring announcement prompted a number of investors to take a closer look at the company, and they decided its shares were so rock-bottom as to be worth a flier. Since its book value tops $8 (U.S.) per share, the stock was trading at 0.2 times book. Even with the recent gains, price-to-book is just 0.4.

Another point worth noting: Kingsway owns 13.8 million shares in a U.S. company called Atlas Financial Holdings Inc., which filed in August for an initial public offering. Kingsway registered to sell all its shares in the offering; it valued them at $38.3-million at June 30, according to its most recent financial statements.

At $1.70 (Canadian), its September low, Kingsway's entire market capitalization was just $22-million. Even now, it's about $50-million, suggesting the remainder of the company is priced at just $12-million.

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If Kingsway can actually restructure its business to profitability, the shares may still have room to run.

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