When I first bought Impac Mortgage (back at the beginning of August) it was on the basis of GAAP earnings (which were 50 cents per share in the second quarter), and revenue growth from the mortgage origination business. Soon after, when I looked more closely into earnings, I determined that much of what was reported in GAAP was obscured by mark to market adjustments and a legacy business that is no longer operating. Fortunately if I ignored these effects, the resulting picture was even better than the one painted by GAAP.
So I left it alone and went on to other things.
To digress for a minute, this is my process. Once I feel like I have a clear answer on a stock, I don’t look too much further into the details. When I look at a stock I look hard, and I usually come up with a fairly accurate picture, but after I feel able to draw a conclusion, I don’t spend a lot more time quibbling over the details.
I don’t have time. I have time to look into maybe 2 stocks per week. If I spent week after week evaluating a single security, it is simply inefficient.
Does this lead to mistakes? Absolutely. Sometimes I miss a key aspect that changes the equation. But to mitigate mistakes I have learned to reevaluate when the market tells me I am wrong, and to act quickly when it turns out I am. And actually, this has been one advantage of starting this blog. There have been a couple of cases where readers have pointed out something that I have missed. And I’ve saved money as a result.
Given the amount of time I have to allocate to investing, this remains, in my opinion, my most efficient process. Study the business, figure out what the key drivers are and where problems are most likely to arise, evaluate those drivers and problems, make a decision and move on to the next one. Take another look if things start to go amiss.
With respect to Impac, as the stock moved up from $2.50 to $10, I wasn’t that concerned with getting a better grasp on the specifics of earnings. My initial analysis showed me the drivers, and they led me to conclude that the stock wasn’t even close to reflecting those drivers, and that was enough for me.
But now, with Impac hovering between $10 and $11, further analysis is warranted. My intent below is to understand how each of the businesses that Impac operates generates earnings, and to compare the earnings generation capacity to GAAP, hopefully eliminating some of the confusion introduced by GAAP. Read more