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Posts tagged ‘phh corp’

Returning to PHH Corp

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

Is the Gain on Sale Boom over?

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

Why is PHH Corp so cheap?

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

Impac Mortgage: Where the money comes from

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