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
With the earnings plate of stocks I own full to the brim, it was a bit of a tough week to be away. The consequence was that I was not able to review many of the reports and conference calls until this weekend, and in a few cases the stocks suffered significant drops in the interim.
This was the case for Walker & Dunlop, the commercial mortgage originator that I’ve owned for the last four months. In my original and follow up post on the company I described the investment thesis as being based in part on the continuation of their history of growth as a multi-family lender, and in part based on their relatively recent relationship with Fortress Investment Group, who I expected to open a few new doors for the company.
One door was opened in the first quarter with the initiation of an $850 million bridge lending program aimed at borrowers who would eventually qualify for Fannie, Freddie, CMBS or HUD channels. This is a solid step for the company as it opens up another destination for its originations, but at 8% of loan volumes its not a game changer. 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
I wrote the following article on the weekend for SeekingAlpha publication. Hopefully it will be published on SeekingAlpha in the next few days.
Impac Mortgage Holdings (IMH) is a very simple thesis and so I am going to get straight to the point. Impac is a mortgage originator and real estate services provider that has been growing their origination business at an impressive rate. In addition to its two operating segments, the company has discontinued operations in run-off associated with its pre-2008 activities in mortgage lending and as the manager and residual holder of non-recourse trusts.
Impac earned $1.50 per share from mortgage originations and real estate services in the third quarter. The mortgage origination business pulled in earnings per share of $1.04, while real estate services business earned $0.46. Below are earnings for these two segments over the first three quarters of 2012.
In addition to these strong numbers, growth is expected to continue to be strong going forward. The company noted on the third quarter conference call that origination volumes in October were another 22% higher than the average monthly volume in Q3. Read more