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.