On September 19th I received an email from a friend (hat tip
@VermeulenGold) that an activist investor, Orange Capital, had taken a 5% position in PHH and written a letter to management outlining their recommendations on creating shareholder value. I immediately took a position in the stock.
In order to describe why I acted so quickly, let’s go back to why I sold PHH in the spring. There were two reasons. One was my concern that gain on sale margins would compress significantly – a concern that remains valid today (and could still be my undoing with the stock). The other was that there just didn’t seem to be a catalyst to realize the valuation gap that I saw.
Now, with that catalyst having materialized, I want to be along for the ride.
I wrote about PHH over a year ago. I described the company as having Joel Greenblatt type of spin-off potential. The company had two disparate businesses with little in common. There were aspects of the one business that clouded the accounting of the other. And one of those businesses, mortgage origination, had a not well understood but valuable asset in the mortgage servicing rights that were held.
Now that I have had a chance to read the Orange Capital letter in full, I am happy to see them draw similar conclusions. I added to my position in the company on Monday. It’s a 4.5% position.
The Orange Capital Letter
I would recommend reading the letter in full, it is available here, but briefly, these are the four initiatives suggested by Orange Capital: Read more
Short Lived Niko Experience
I wrote about a new position in Niko in a short summary 3 weeks ago. A couple weeks later I sold the stock. What can I say – its part of my process. A lot of times I only get clarity about a stock once I own it. I buy a position, sit on it for a few days or a week, and do some more background and some more thinking on the name. With that my opinion becomes more clear.
The discomfort I developed with Niko was partially the result of another batch of less than stellar drilling results, but mostly the result of my conclusion that this isn’t the right time yet. The driver of the share price will be the settlement of a new gas price contract in India. I don’t think this is likely to occur until the existing contract expires, which is not until next year. In the mean time Niko will continue to experience production declines in India, and they are open to negative news flow on drilling. Read more
Earlier this week my portfolio was rolling along nicely, having closed at an all-time high on Wednesday night with me looking forward to further gains ahead.
And then Flagstar reported their fourth quarter results.
I don’t own Flagstar. I don’t even follow Flagstar. They are a Michigan based bank that has had some problems in their past and, most importantly for this discussion, run a reasonably large sized mortgage operation. In the fourth quarter Flagstar reported a big decline in their gain on sale margin, from 244 basis points to 153, and the Street took it to mean that the mortgage origination boom was over. In addition to the carnage of Flagstar (down about $2.50 to $15.57 on Thursday), PHH Corp, Impact Mortgage and Nationstar all took it on the chin.
But while the headline decline was steep, there is more to the story. During the conference call Flagstar provided some clarity. The following exchange between Matthew Kerin, the president of the Mortgage banking division, and Paul Miller of FBR is instructive (via SeekingAlpha). Read more
Let’s just get right to it. I don’t understand why PHH is as cheap as it is.
I have talked about this before, and I don’t want to reiterate the conclusions of my prior post on PHH (You can be a stock market genius: By Buying PHH Corp), but I do want to take a look at the company from a slightly different perspective to show that, even after the 50% run up since my original post, it remains undervalued.
This week, during one of my lunch hours, I made a comparison between PHH and Nationstar. I was somewhat surprised by the results. The table below lists key statistics of the mortgage origination and servicing businesses for both companies. Read more