Lee Cooperman Buys More Ocwen Financial

Per a Form 4 filed with the SEC, Omega Advisors' Lee Cooperman has indicated he's purchased more shares of Ocwen Financial (OCN).  This is the second time this year he's purchased shares, as we highlighted his previous OCN buy as well.

In various trades on February 28th, March 1st, and March 2nd, Cooperman bought 539,798 shares in total at prices around $3.5872 for various Omega investment vehicles.

For more on this investor, be sure to also check out Cooperman's recent interview in the Graham & Doddsville newsletter.

Per Google Finance, Ocwen Financial is "a financial services holding company. The Company, through its subsidiaries, originates and services loans. The Company's segments include Servicing, Lending, and Corporate Items and Other. The Company's Servicing segment consists of its residential servicing business. The Company's Lending segment is focused on originating and purchasing conventional and government-insured residential forward and reverse mortgage loans. The Company's Corporate Items and Other segment includes revenues and expenses of Automotive Capital Services (ACS) and its other business activities. Its servicing clients include some of the financial institutions in the United States, including the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the Government National Mortgage Association (Ginnie Mae) and non-Agency residential mortgage-backed securities (RMBS) trusts. "

Lee Cooperman Acquires More Ocwen Financial

Lee Cooperman of Omega Advisors has filed a Form 4 with the SEC regarding shares of Ocwen Financial (OCN).  Per the filing, Cooperman's most recent activity was buying shares of OCN on January 22nd and 23rd at $3.1582.  In total across various vehicles, he purchased 494,459 shares. 

In an additional 13G filed with the SEC, Cooperman disclosed he now owns 10.5289% of the company with over 14.04 million shares.  Omega previously only owned 8.66 million OCN shares as of the end of the third quarter in 2017.

Per Yahoo Finance, Ocwen Financial is "a financial services holding company, engages in the servicing and origination of mortgage loans in the United States. Its Servicing segment provides residential and commercial mortgage loan servicing, special servicing, and asset management services to owners of mortgage loans and foreclosed real estate. This segment's residential servicing portfolio includes conventional, government insured, and non-agency loans. The company's Lending segment originates and purchases conventional and government-insured residential forward and reverse mortgage loans primarily through its correspondent lending arrangements, broker relationships, and directly with mortgage customers. The company also provides short-term inventory-secured loans to independent used car dealers to finance their inventory. Ocwen Financial Corporation was founded in 1988 and is headquartered in West Palm Beach, Florida."

Kingstown Capital Sells Some Ocwen Financial Equity, Buys Senior Notes

Michael Blitzer hedge fund firm Kingstown Capital Management has filed an amended 13D with the SEC regarding its position in Ocwen Financial (OCN).  Per the filing, Kingstown now owns 7.66% of the company with 9.5 million shares.

This is a decrease in their common stock position compared to the 11.35 million shares they owned at the end of the second quarter.  The filing was made due to activity on August 31st. 

It also indicates they purchased 6.625% Senior Notes due 2019.

Per Google Finance, Ocwen Financial is "a financial services holding company. The Company, through its subsidiaries, operates as a mortgage company. The Company's segments include Servicing, Lending, and Corporate Items and Other. The Company's Servicing segment consists of its core residential servicing business. The Company's Lending segment is focused on originating and purchasing conventional and government-insured residential forward and reverse mortgage loans. The Company's Corporate Items and Other segment includes business activities that include providing secured floor plan lending to used car dealerships through its Automotive Capital Services (ACS) venture and providing financing to investors to purchase single-family homes and apartments for lease through its Liberty Rental Finance venture. The Corporate Items and Other segment also includes the diversified fee-based businesses, which provide property valuation, real estate owned (REO) management, title and closing services."

Kingstown Capital Boosts Ocwen Financial Stake

Michael Blitzer's hedge fund firm Kingstown Capital has filed an amended 13D with the SEC regarding its position in Ocwen Financial (OCN).  Per the filing, Kingstown now owns 9.97% of Ocwen with over 12.5 million shares (though they have an aggregate economic exposure to 14 million shares due to cash-settled total return swaps).

This is up from the 12 million shares they owned at the end of the first quarter. The filing was made due to activity on August 4th.  The return swaps were purchased on August 4th and 5th at prices of $8.0053, $7.6299, and $7.7450.

The 13D contains the standard activist boilerplate that they may meet with management etc.  Kingstown was the largest reported institutional shareholder of OCN shares as of the end of Q1.

Shares of OCN were hit pretty much all throughout 2014 as regulator Benjamin Lawsky came down hard on the company, forcing its Chairman Bill Erbey to resign, among other changes.  OCN fell from $55 to $15 in 2014 and has continued to fall in 2015 down to current levels of $8.11.  Kingstown initiated their position in the first quarter of this year and has just recently bought more.

As we've highlighted earlier this year, Kingstown was also involved in shares of Home Loan Servicing Solutions (HLSS), another one of the companies that was in Bill Erbey's previous empire.

Per Google Finance, Ocwen Financial is "a financial services holding company. The Company through its subsidiaries is engaged in the servicing and origination of mortgage loans. The Company operates in three segments such as, servicing, lending, and corporate items and other. The Company develops programs, such as Shared Appreciation Modification (SAM) which incorporates principal reductions and lower payments for borrowers while providing a net present value positive loss mitigation outcome for investors, including the ability to recoup losses if property values increase over time."

Lee Cooperman Trims Altisource Portfolio Solutions Stake

Omega Advisors' Lee Cooperman has filed a Form 4 with the SEC regarding his position in Altisource Portfolio Solutions (ASPS).  Per the filing, Cooperman has sold around 262,000 shares.

He was selling on March 16th and 17th at weighted average prices of $16.33 and $15.57.  ASPS has since continued to slide lower and currently trades around $12.73.  We've outlined the ASPS situation here previously.

Per Google Finance, Altisource Portfolio Solutions is "a provider of marketplace and transaction solutions for the real estate, mortgage and consumer debt industries. The Company operates through three business segments: Mortgage Services, Financial Services and Technology Services. The Company offers mortgage services, such as Asset management, Insurance services, Residential property valuation, Default management services and Origination management services. Financial Services provide collection and customer relationship management services to debt originators, servicers and the utility and insurance industries. Technology Services provides software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing, including the automated management and payment of a distributed network of vendors."

We've detailed other recent portfolio activity from Cooperman here.

What We're Reading ~ Hedge Fund Links 1/9/14

Love him or hate him, Bill Ackman now runs the top hedge fund [Bloomberg]

Meet the most powerful woman in hedge funds [CNBC]

ValueAct takes swipe at MSCI [FT]

Jeff Gundlach: I just hope the Fed thinks carefully about what it's doing [FUW]

Kyle Bass going after big pharma [Business Insider]

3G Capital eyes next targets [WSJ]

Mohnish Pabrai: I have no original ideas, I am a 100% cloner [Rakesh Jhunjhunwala]

Permanent capital: perpetual cash machines [FT]

Top hedge fund trends for 2015 [FINalternatives]

Tiger Global funds Glassdoor [Glassdoor]

Is something a 'failure' if other successes come from it? [Eddie Lampert]

Tom Brown on Ocwen's abominable deal with New York regulators [Bank Stocks]

What We're Reading ~ Analytical Links 11/5/14

The Misbehavior of Markets: A Fractal View of Financial Turbulence [Benoit Mandelbrot]

What's your investing edge? [Clear Eyes Investing]

Building a personal margin of safety [Abnormal Returns]

Managing someone else's emotions [A Wealth of Common Sense]

On taking losses and the value of survival [Long Short Trader]

A look at Ocwen Financial & Altisource Portfolio Solutions [Doug Kass]

A look at C.H. Robinson [Punch Card Investing]

On Hewlett Packard's break-up [Aswath Damodaran]

First time homebuyers hit lowest in nearly 30 years [CNBC]

On Japan and business vs economics [Paul Krugman]

Underwriting the next housing crisis [NYTimes]

An interview with Google's Larry Page [FT]

How confirmation bias can lead to spinning wheels [NYTimes]

Sears has a deal to offer its shareholders [Bloomberg View]

John Maynard Keynes is the economist the world needs now [BusinessWeek]

The way to make solar energy a hot investment? Make it a boring one [Slate]

Pennant Capital Raises Ocwen Financial Stake

Alan Fournier's hedge fund firm Pennant Capital has filed a 13G with the SEC on their position in Ocwen Financial (OCN).  Per the filing, Pennant now owns 7.2% of the company with over 9.44 million shares.

This means they've boosted their position size by 4 million shares since the end of the second quarter.  Shares of OCN have been under extreme pressure as regulators scrutinize the non-bank servicers.  They're seeking to beef up compliance and have previously halted OCN's purchase of mortgage servicing rights (MSRs).

The filing was made due to activity on September 22nd. 

Per Google Finance, Ocwen Financial is "a financial services holding company. The Company is engaged in the servicing and origination of mortgage loans. The Company's Shared Appreciation Modification (SAM) incorporates principal reductions and lower payments for borrowers while providing a net present value positive loss mitigation outcome for investors, including the ability to recoup losses if property values increase over time."

What We're Reading ~ Analytical Links 2/12/14

The single best metric: EV/EBITDA [Crossing Wall Street]

Why margin debt matters [Seeking Alpha]

What I learned at the mall about investing [Institutional Investor]

Half of Americans can't raise $2k in 30 days [Time]

Get ready for a long proxy fight over Time Warner Cable [Dealbook]

John Maynard Keynes' own portfolio not too dismal [NYTimes]

Don't believe the tech bubble hype [Andreessen Horowitz]

US switching from credit card signatures to PINs, but banks need to get on board [Verge]

Investor group targets Ocwen's mortgage servicing practices [FT]

Microsoft's mobile muddle [Stratechery]

Two notable mutual fund trends [AAII]

Why ADT is appalling [Herb Greenberg]

How Mulberry got squashed in fashion's squeezed middle [The Guardian]

Coca Cola: glass less than half full [FT]

On an upturn in capital spending [FT]

Sohn London Conference Notes 2013: Hohn, Armitage, Tangen, Gaonkar & More

The 2013 Sohn London Conference just took place and MarketFolly has notes below.  The event featured hedge fund managers presenting their latest investment ideas benefiting paediatric cancer and childhood disease research.


Sohn London Conference Notes 2013

Chris Hohn – The Children’s Investment Fund  

Following on from last week’s disclosure that TCI had bought a large part of the UK’s privatised post office, Royal Mail, in the secondary market, Hohn pitched two more privatisation ideas. He said that governments are the worst manager and that there are huge efficiency savings to be made in the aftermath of a privatisation.

Idea 1: Aurizon (Australia)  - Aurizon, formerly QR National, is a publically listed rail company in Australia. According to Hohn, Aurizon’s CEO, Lance Hockridge is a winner. Recent returns have been about 10% per year with 6% volume growth per year. The cost cutting potential is huge. Large scale redundancies are already underway. Aurizon was privatised with no debt, which Hohn said was ridiculous. Hohn implied that he has been pressing the company to re-lever and that he had had some success. Aurizon can have a double digit dividend within a couple of years. The company is a play on the Austrailian commodities market and the Chinese and Indian economic growth.

Idea 2: Long EADS  - Hohn noted that the company has had a bad record with investors – no one has made money for 30 years. Sometimes it pays to study the history of a company. He believes that the EADS will double and then triple profits in the coming years. Airbus is now competing well with Boeing. There is no chance of new competitors breaking into the market as safety concerns keep new entrants out. Pricing is increasing. Costs are falling as suppliers are squeezed for the first time. EADS is committed to 3.75bn euro of stock buybacks over the next 18 months. EADS 10x multiple can close the gap on Boeing’s 15 x multiple.



John Armitage - Egerton Capital  

Idea 1: Long Nordea (Sweden)  - Armitage said that Nordea is a simple, low risk stockpick which he referred to as a ‘teddy bear stock’ because it allowed him to sleep well at night. Nordea is the leading Scandinavian bank – being #1 or #2 in most Nordic countries. Nordea performed well in the financial crisis. The bank does not look for dynamic growth in earnings and that is its strength. Boring is good in the banking sector. Nordea will grow moderately in the future. Its market has oligopolistic qualities. Loan loss rates will drop for a prolonged period of time. Nordic banks are much better capitalised than their European or US counterparts. The dividend is likely rise over time.

Idea 2: Long Ocwen (OCN)  - Armitage said that whilst his first pick had been simple and straightforward, Ocwen was a far more complex and complicated situation. Ocwen is a mortgage servicing business which sits at the core of the difficulties that the US housing sector has faced since the financial crisis. In the US, mortgages are packaged and turned into bonds. Many of the loans made over the last decade or so are delinquent and have needed to be modified or foreclosed. Big banks have been overwhelmed and are often too unfocused to carry out the mortgage servicing task that Ocwen specialises in. Ocwen has a good technology platform which he referred to as a dialogue engine. It profiles a borrower’s ability to pay back mortgages. Making the appropriate loan modifications is a key driver of success or failure. Ocwen’s founders own 22% of the business. There will be growth in income from the existing portfolio of loans. They are producing $1.1bn of FCF. Some of that money will be used for stock buybacks which have recently been agreed. Ocwen are well placed to make acquisitions. Armitage believes that Ocwen will be able to deploy their existing expertise and technology to diversify into new markets such as car loans and subprime.  Note that Steve Eisman also pitched OCN at the Invest For Kids Chicago conference this week as well.


Nicolai Tangen – AKO Capital  

Idea: Long Experian  - Experian is the largest credit bureau in the world. It has a strong balance sheet and strong organic growth at 7%. They have lifted margin growth by 700 basis points in the last 6 years. Tangen believes margins will continue to increase in the future. Experian is selling credit data in more and more countries and the great thing about credit data is that you can often sell the same data several times. Demand for credit data has risen since the financial crisis as regulators have forced banks and other financial institutions to become more discerning about who they lend to. The rise of the internet and E-commerce is also creating demand for credit data. Experian has a significant moat as there are no other global players, just regional competitors. There are three players in the US but only 2 players in other countries. Experian is a safe play in as much as it has counter-cyclical qualities. Its gearing is falling rapidly as the cash keeps coming in.



Mala Gaonkar, Lone Pine Capital  

Mala Gaonkar is a co-portfolio manager at Lone Pine, a role she has held since 1998.

Idea: Long Qualcomm (NAS: QCOM)  - 3G & 4G wireless data and voice standards create two thirds of the business. The other one-third is from chips. Expect more unit growth in the smart phone market than most people assume. It will double in the next three years. Generally speaking, we will replace our smartphones more quickly than many analysts assume. The active broadband market is not yet mature. Royalty rates are resilient. QCOM has far more patents than their competitors. They will be able to diversify into new mobile devices in the future.  



Julian Sinclair – Talisman Global Asset Management

Idea 1: Long Tata Motors -  Sinclair valued Jaguar and Land Rover at around $17bn, the same as Tata’s market cap. Jaguar and Land Rover make up about 80% of Tata’s net worth so you get the other 20% for free. Jaguar and Land Rover are quintessential British brands. They are now competing well with the big German luxury brands in terms of quality and reliability. Tata is producing more reliable cars than it used to and that has been backed up by recent JD Power surveys. Tata is trading at 6x earnings. Sales are expected to expand by 20% during the next five years. There is potential for the share price to double Tata can even attain the double digit margins that Porsche has achieved. Tata is growing top line and bottom line simultaneously. Tata is also has potential as an emerging market recovery play.

Idea 2: Shared Appreciation Mortgages (SAMs)  SAMs are a form of mortgage backed security created in the late 1990s by banks like Barclays and Royal Bank of Scotland in the UK. Sinclair sees SAMs as the last great post-crisis credit trade. If house prices go up by 2-3% they will pay out 11% and if prices go up by more they will pay out even more. SAMs have a defensive quality too. If house prices were to fall by 5% SAMs would still pay out a similar return to Gilts (UK government bonds).



Eashwar Krishnan – Tybourne Capital Management  

Eashwar Krisnan spent 12 years as a Managing Director and Senior Analyst at Lone Pine. In 2007, he moved to Hong Kong to set up and manage Lone Pine’s operation in Asia. He set up his own fund  Tybourne Capital in 2012. Tybourne focuses mostly on equities in the consumer, financial and TMT   sectors in Asia.

Advertising in India is 20x cheaper than in the US. Over time the gap will narrow. TV dominates advertising spending in Asia. There is a favourable environment for investing in commercial TV businesses in Asia at the moment. Indonesians watch an average of 5 hours Television per day. He likes companies run by owner operators with skin in the game. Advertising growth rates can grow at double digits for many years.

Idea 1. Long Media Nusantara Citra MNC (Indonesia). Nusantara has 42% of audience share; it’s the industry price leader.

Idea 2. Long Surya Citra Media (Indonesia). Surya has 22% of primetime TV. It develops and owns content, which produces high returns on capital.

Idea 3. Long Zee Entertainment Enterprises (India)  - Zee is the #2 provider after Star owned by Fox (Tybourne hold Fox stock too). Zee will be a beneficiary of digitalisation. Two-thirds of TV viewers in India receive an analogue signal at present.

Idea 4. Sun Investments (India). Sun is the #1 player in Southern India.



Ross Turner – Pelham Capital  

Ross Turner was an equity partner with Lansdowne Partners and set up Pelham Capital in 2007.

Idea: Long DCC Plc  - DCC was listed in Ireland but has transferred its main listing in the UK. It is a distributions services company with a large energy division – oil and LPG. This part of the business is straightforward involving the pickup of the product from terminals and distribution to the customer. In oil distribution in the UK, they are the only distributor with a national network giving them a dominant market position. DCC have developed their market position through bolt on acquisitions. The LPG market is more consolidated but they have greater pricing power there. Europe only makes up 15% of DCC’s income, but they are beginning to make in-roads via the same strategy of bolt on acquisitions. DCC is a stable business with a strong competitive position. Turner believes the valuation is still attractive as no one takes into account the continued impact of the acquisitions. He   sees 15% earnings growth per year going forward.



Mas Siddiqui – Naya Management  

Before founding Naya in July 2012, Mas Siddiqui was a partner at TCI Fund where he was responsible for global investments in credit and equities. Previously he was Managing Director at Canyon Partners.

Idea 1: Long Salvatore Ferragamo (Italy)  - Salvatore Ferragamo creates, develops and produces clothes and shoes for men and women and fragrances and eyewear. Despite being based in Italy, only 25% of its sales are in Europe. Sales in emerging markets are larger and this should continue as the EM consumer becomes better off. They are growing top line growth and they have scope to increase their prices. Salvatore is an ‘undermanaged company’ with plenty of room for improvement. Labour costs are 50% higher than its peers and they could reduce them. He did not say whether he had been pressuring the company for change but it seems quite possible given his background at TCI and his take on the company. The company has a clean balance sheet and is considering a large return of cash via a special dividend, which Siddiqui indicated is being sought by family owners who hold a 60% of the stock.

Idea 2. Short Essilor International   - Essilor is an ophthalmic optics company based in France. It is a world leader in the manufacturing of lenses for glasses. Using FCF and organic growth, Siddiqui believes the company is wildly overvalued. Naya’s research shows that brands do not have much impact in the lenses market. New digital production techniques will cut costs and lead to deflation in the sector. Competition from Zeiss and Hoya will intensify.



Bruno Rocha – Dynamo Capital  

Rocha started by using data from Dimson, Marsh and Staunton’s data set (see the Credit Swiss   Yearbooks) to argue that there is no relationship between GDP and equity returns. In fact he said that the data suggested that slow growing countries produce better equity returns that fast growing counties. Rocha said that what goes for countries is true too for business sectors where growth in earnings is different from growth in earnings per share. Slow growing countries and companies can create better returns for investors than fast growing countries and companies.

Idea: Long Anheuser Busch Inbev (BUD) -  In the beer business, Rocha showed that contrary to popular wisdom, Inbev was more profitable in wine drinking France than in beer drinking Germany. Rocha noted that there are only four big beer companies left in the western world. Inbev has economies of scale allowing it to benefit from the mature, consolidated markets.



Andrew Weiss – Weiss Asset Management  

Intriguingly, when Andrew Weiss was introduced it was suggested that his presentation at Sohn London was the first time he had ever spoken to a large investment audience as he normally prefers to address academic gatherings. Weiss then pitched one of his own funds as his investment idea.

Idea: Long Weiss Korea (LON: WKOF) - Weiss Korea invests in the listed preferred shares of companies incorporated in South Korea.  Andrew Weiss said that there are four things going for the investor in South Korea. Firstly stocks are cheap. Secondly, there is potential for future economic growth as the demographics are good; the workforce is well educated; the road, rail and internet infrastructure is sound; there is low debt to GDP and good natural resources. Thirdly there are catalysts to change including changes to the regulatory environment in favour of shareholders. Fourthly, there are exceptional access products like preferred shares. In Korea preferred shares are similar to ordinary shares but without the voting rights. Preferred stock tends to trade at a large discount to ordinary shares in Korea. 


For more hedge fund conference coverage, check out notes from other recent events:

- Invest For Kids Chicago notes: Lasry, Eisman, Cooperman & more

- Great Investors Best Ideas notes: Price, Akre, Pickens & more

- Excellence in Investing San Francisco notes: Burbank, Billick, McGuire & more

- Value Investing Congress notes: Ubben, Smith, Yacktman, Roepers & more

Steve Eisman on Ocwen Financial & Altisource Portfolio Solutions: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago 2013 is Steve Eisman of Emrys Partners.  He pitched two ideas: Ocwen Financial (OCN) and Altisource Portfolio Solutions (ASPS).


Steve Eisman's Presentation at Invest For Kids Chicago 2013

•    His big trade is detailed in Michael Lewis' book, The Big Short
•    “Time to up meds” after Gundlach’s presentation
•    Been analyzing financial companies for over 20 years
•    This cycle is different
•    Discussion of regional banks
•    Past cycles when you come out of recession, the loan book gets better, then loan books expand
•    Credit quality has gotten better and there is no loan growth and the Fed is not going to raise rates anytime soon
•    Assumes US growth to be 2%
•    Looking for secular growth stories bc he doesn’t want to trust US growth
•    Looking specifically at mortgage sector


•    Idea #1: Ocwen Financial (OCN): Best story in financial services
o    Servicing of current mortgages and everything else
o    Servicing of everything else requires a human
o    Banks lose money servicing mortgages and so the shift is going away from banks and towards mortgage servicing companies such as Ocwen
o    Key is that it enjoys a 70% cost advantage over anyone else due to moving servicing to India
o    Earnings have gone up 7x since 2010 and still in middle innings
o    Another trillion of mortgage servicing rights to be transferred in the next few years (Ocwen has $400 billion pip by themselves)
o    Cash generation is huge: 16% 2014E Free Cash Flow Yield (not to mention 50% growth)
o    50% upside in the next year or two assuming no multiple expansion
o    And multiple expansion is definitely possible

Eisman pitched Ocwen at the Sohn Conference in New York as well earlier this year.


•    Idea #2: Altisource Portfolio Solutions (ASPS) 
o    Stock price of $144.8
o    Spun out of Ocwen and now have three businesses
o    Key to story is massive diversification
o    Growth is 42% year over year for Q3 2013
o    Hubzu is a part of mortgage solutions biz – until recently
o    Can buy a house online and is 15% of earnings of company
o    Zillow doesn’t own MLS system
o    70% ROE and PEG ratio of 0.34x
o    Covered by one sell side analyst
o    3 questions were asked on recent call and one sell side guy asked 2 questions
o    Hubzu has revenue of 35% of Zillow and Zillow is a $3 billion company 

We've posted an in-depth analysis of Altisource Portfolio Solutions for those interested


Check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Investment Thesis on Altisource Portfolio Solutions (ASPS)

The following is a guest post from Glenn Chan who is passionate about investing and maintains a blog at glennchan.wordpress.com.  He is based in Toronto and is currently looking for a position as a junior analyst.  He can be contacted at: glennchan [at] gmail [dot] com


Investment Thesis on Altisource Portfolio Solutions (ASPS)

Altisource is a rapidly-growing business that is riding the trend of financial companies outsourcing their mortgage servicing.  The process of servicing mortgages has become more complex as the US government continually adds more regulations to protect homeowners from foreclosure.  The cost of complying with government regulations and creating automated systems to handle mortgage servicing is mostly fixed.  These economies of scale will likely push the industry towards consolidation.

Altisource has grown its revenues per share by an incredible 36%/year from 2008-2012 (historical stats) and currently trades at a P/E ratio of 21.6 (at $97.36/share).  Its growth next year is practically guaranteed due to its unique relationship with Ocwen Financial (OCN).  ASPS' forward P/E is roughly 11.8 (according to Yahoo Finance).  I believe that Altisource is the best managed mortgage servicer in its field. 


History and Financial Structure

Altisource spun off from the parent Ocwen in 2009.  Altisource contains the “good” high-margin businesses while Ocwen is the “not as good” business with lower returns on capital.  Interestingly enough, the CFO at the time (Robert D Stiles) chose to jump ship and join the smaller company.  I’m guessing his stock options have done well since Altisource shares are up 508% since the spinoff.

Normally one would stay at the larger company as it is likely to pay a larger salary.  He had the foresight to jump ship to the rapidly-growing Altisource.  As the CFO, he structured Altisource as a Luxembourg company so that Altisource would save money on taxes.  I personally think that he is a very smart guy.  Unfortunately, he resigned on Feb 22, 2012.  Some of the clauses in his separation agreement suggest that he and his bosses had disagreements.  For example there is a clause that states: “The undersigned Managers agree not to disparage Stiles.”  I suppose I won’t know what happened.

One key aspect of the spinoff is that Ocwen has to use Altisource’s services.  This means that whenever Ocwen sells shares or raises debt to buy mortgage servicing portfolios, it brings business to Altisource.  Altisource does not have to spend money on attracting this new business.  And of course it grows when Ocwen grows.  The financial structure also allows Ocwen to grow very quickly through selling stock, allowing both companies to enjoy economies of scale.  If the endgame of the mortgage servicing industry is ‘survival of the biggest’, Ocwen and Altisource are well positioned.  Unlike Ocwen, Altisource will not face share dilution.  Altisource is buying back its shares, not selling them.


The Other Spinoffs and IPOs

William C. Erbey is the chairman of Ocwen and Altisource.  His empire has since expanded into even more companies.  Home Loan Servicing Solutions (HLSS) is an new company that raised funds in an IPO.  It will focus on owning mortgage servicing rights (MSRs).  HLSS use services from Ocwen and Altisource at cost plus a 15% markup.

Altisource split up into three stocks, of which there are four important entities:

ASPS - The parent company.

RESI - Altisource Residential.  RESI’s business model is to (A) buy and manage portfolios of non-performing and sub-performing mortgages and (B) rent out the homes they get stuck with whenever foreclosure cannot be avoided.  This is a new venture that has no operating history.  ASPS will benefit from growth in RESI as ASPS will provide services to manage RESI’s real estate.

AAMC - Altisource Asset Management.  AAMC is RESI's asset manager and is entitled to payments from RESI based on the level of RESI's dividend payments.

NewSource Title Reinsurance.  NewSource will provide title insurance services to Altisource/ASPS and RESI.  The financial structure is very tricky as all three companies have different positions in its ownership structure.  AAMC will invest $2M in NewSource equity while RESI will invest $18M into NewSource non-voting preferred shares (12% dividend).  ASPS will provide services to NewSource under a Title Insurance Services Agreement.  ASPS will receive 90% of NewSource’s net income after “NewSource pays Residential a preferred dividend of 12% (which is an annual cumulative rate)”.

RESI will receive a 12% dividend yield... this is a good return.

AAMC will receive $840K (adjusted by CPI) in management fees from NewSource plus 10% of net income.  This is a very high return for a $2M investment.  Net income will likely consist of returns from the insurance float and profit from title insurance/reinsurance, which has extremely high margins.  When homeowners buy a house, they typically go with the mortgage originator’s recommended title insurance company.  They overpay for title insurance because:

1. They may not know any better.
2. Compared to the cost of the house, title insurance costs very little.
3. They may not want the inconvenience of shopping around for title insurance.  A different title insurance company can lead to paperwork delays.

ASPS is the loser in this deal in my opinion.  ASPS will be directing its profitable title insurance/reinsurance business towards NewSource where RESI and AAMC will take their cut.  NewSource is expected to have a “steady stream of title insurance and reinsurance sourced by Altisource through its relationships with Ocwen and Lenders One, a national alliance of leading community mortgage bankers, correspondent lenders and suppliers of mortgage products and services” (see AAMC’s filings).

OCN, RESI, and HLSS will likely continue to raise capital and continue to do secondary offerings.  They will drive more business towards ASPS and AAMC.


Following the Money

Overall, Erbey's stock ownership looks something like this:

1. Altisource Asset Management (AAMC): 30.1% according to this 13D filing
2. Altisource (ASPS) – 25.4% (5,935,343 shares / 23.36M shares outstanding)
3. Ocwen (OCN) – 13.2%
4. Altisource Residential (RESI) – 9.9% after the secondary offering closes according to this 424B1 filing
5. Home Loan Servicing (HLSS) – 2.8%

Based on these ownership figures, AAMC and ASPS are the stocks to own.

Erbey owns a larger portion of AAMC than ASPS due to unvested restricted shares.  The 3-way split of ASPS/RESI/AAMC may have been designed to be beneficial to Mr. Erbey as he increased his ownership of the most desirable spinoff.  However, AAMC is quite overvalued at the moment so I am not interested in it.


Institutional Ownership

(This section by MarketFolly): Numerous hedge funds have been involved in OCN and we posted up how Steve Eisman pitched OCN at the Ira Sohn Conference.  Additionally, OCN has been analyzed in past issue of our Hedge Fund Wisdom newsletter.

Turning to top institutional owners of ASPS, Omega Advisors' Lee Cooperman is one of the largest owners of ASPS (he also owns OCN).  In a recent interview he said he likes both as housing proxy plays.

Other top holders of ASPS at the end of Q1 included Matt Iorio's White Elm Capital.  Prior to founding White Elm, Iorio worked at Steve Mandel's Lone Pine Capital.  Like Cooperman, Iorio owns both OCN and ASPS (and both were top 5 holdings at the end of Q1).

In White Elm's Q2 letter, they note:

"Altisource now trades at 10x 2013E consensus earnings per share.  Investors appear to be discounting (1) a material decline in foreclosure activity and (2) ongoing payments from Altisource to help fund Ocwen's future acquisitions.  These concerns are perplexing given that Ocwen's growth has virtually guaranteed a large pipeline of foreclosed properties for Altisource over the next three years and the non-default businesses are growing rapidly.  Over the next three years, we expect Altisource to grow earnings per share at a compound annual rate of nearly 40% and generate approximately $30 per share in free cash flow (or almost 40% of its current market value).  Based on our earnings growth expectations and assuming a modest multiple of 12x 2015E EPS, we believe our road-map to a three-year double with Altisource is achievable."

Quant firm Renaissance Technologies is also one of the top holders at of the end of Q1, though the position size was only a miniscule portion of their overall portfolio.  We won't see who the top holders as of Q2 were until mid-August due to SEC delay rules.  Now back to the rest of Glenn's writeup:


Industry Overview

The Mortgage Lifecycle

On a mortgage, the lender has to handle paperwork and mortgage payments.  If the homeowner is late on payments or stops paying entirely, then the lender has a lot more work to do.  The lender may try to negotiate with the homeowner to get back on track with paying their mortgage.  It may try to get the homeowner to participate in government programs designed to keep people in their homes (in the wake of the subprime housing crisis there are a lot of these programs).  It may try to work with the homeowner on a short sale to avoid the costs of a foreclosure.

Some mortgages will end up in foreclosure.  There are many laws and regulations designed to protect homeowners during the foreclosure process.  Lenders have compliance costs in making sure that they follow all laws and regulations.  After the lenders initiate the foreclosure process, things get really messy.  Ex-homeowners often completely trash the property and may steal appliances, wiring for scrap metal, etc.  Before the property is ultimately sold to a retail consumer, the property will need to be cleaned up and repaired.  Some people squat in their home and may return to it even after they are kicked out; this can sometimes create scary situations for others who are cleaning up the property.  Some lenders don’t want to deal with foreclosure-related problems so they will sell houses to investors for them to fix.  These houses are often sold at large discounts.  Or, they may pay fees to companies like Altisource to clean up the property.  As an alternative, the lender could hold onto the property and rent it out (this is Altisource Residential’s business model).

Mortgage servicers may handle some or all aspects of the mortgage lifecycle.  Some aspects of the mortgage lifecycle are very open-ended and create opportunities for adding value.


Ocwen/Altisource's Performance

A WSJ article makes the following points about Ocwen/Altisource:

- It "has won praise from consumer advocates for its willingness to re-work mortgages and help struggling borrowers stay in their homes".
- The vast majority of its labour force is in India and offshore.  While this lowers costs, there are some concerns about protection of personal data and regulatory compliance.
- It has many offshore incorporations to keep taxes down.

Ocwen/Altisource tries to automate as much as possible.  For example, delinquent mortgagers are sent multiple letters and a DVD explaining the situation (e.g. how to apply to HARP).  This saves time from having a call center employee repeat information to mortgagers.  However, there is still a need for trained call center workers as not everything can be automated.  On Ocwen’s website there is a Morningstar “Operational Risk Assessment” report that contains a lot of detail on Ocwen’s operations.

As for foreclosures, Ocwen/Altisource tries to minimize its sales commissions by running its own real estate portal (Hubzu) and offering real estate agents lower commissions.  Moving away from the traditional MLS models allows Ocwen/Altisource to lower their costs.  Not surprisingly, real estate professionals complain about this (see complaints about Hubzu/gohoming.com/Ocwen/Altisource on pissedconsumer.com).  For activities that require a human touch, Ocwen/Altisource is not perfect.  The complaints page on pissedconsumer.com does suggest that Ocwen/Altisource employees do make mistakes.  The webpage also suggests that Hubzu has a problem with fake bids.


Does Altisource Enjoy a Competitive Advantage?

Labour arbitrage:  I don’t know why but it seems that Altisource’s competitors have not set themselves up to use offshore labour.  Publicly-traded competitors such as Walter Investment Management (WAC) and Nationstar (NSM) only employ Americans.  Outsourcing labour to foreign countries is a difficult problem.  The problem is difficult enough that there are publicly-traded companies which specialize in it (G, CTSH).

Software:  Starting a successful software company is very difficult.  One of the hardest things to do is finding great programmers.  Joel Spolsky (he runs his software company) has a blog post that explains why the process is difficult.  Simply running a software company is very difficult by itself.  It’s even more difficult if you add in the complications of running a foreign operation.  My opinion is that the labour arbitrage is very difficult to pull off.  I don’t know how well Altisource has pulled off its labour arbitrage.  However, Altisource is highly profitable and has many job postings for Indian programmers/developers.

Business processes: Altisource is much better than its peers at working with delinquent mortgagers at restructuring loans.  I don’t know how easy/hard it is to duplicate this.

Overall, I don’t think that Altisource’s high margins are based on a single thing.  It is a combination of many things that they do well.  The Morningstar report referred to earlier “Operational Risk Assessment” provides a lot of insight into the many things that Altisource is doing.  Some of their practices seem to require hard-won experience.  Altisource takes many steps to prevent payment processing employees from stealing (e.g. video surveillance, no drawers in the room, etc.).

Scale:  I believe that scale gives a minor cost advantage.  Ocwen/Altisource is not the largest mortgage servicer however.  This Reuters article states that big banks such as BAC, Wells, Ally, JPM, and C are the leading mortgage servicers.  All five of these banks paid settlements over robo-signing… this suggests that they are not very good at mortgage servicing.  All these banks let ex-homeowners squat in their own homes without paying their mortgages for years during the subprime housing era (including Wells Fargo, a Warren Buffett favorite).  I think that Altisource is well-positioned against these larger mortgage servicers.  Ocwen has bought Ally’s Rescap unit and Goldman Sach’s Litton Loans.

Relationship with Ocwen:  Altisource’s relationship with Ocwen has been hugely beneficial for Altisource since Ocwen is a captive customer.  Better yet, Ocwen has been continually issuing equity and increasing its assets.  Altisource has been growing without having to spend advertising/marketing money to get more business from Ocwen.  However, Altisource would still do extremely well without Ocwen.  Ocwen’s share of Altisource’s mortgage services revenues has been declining as organic growth from non-Ocwen customers has exceeded Ocwen’s growth.  The 10-K provides relevant figures:

In 2010, related parties accounted for 73% of Altisource's mortgage services revenue.
In 2012, related parties accounted for 68% of Altisource's mortgage services revenue.


The Future of the Mortgage Servicing Industry

My guess is:

1. The major banks will get out of mortgage servicing and outsource.  They don’t seem to be very good at it (e.g. robo-signing)… engaging in illegal activities suggests incompetent management.

2. The trend towards outsourcing mortgage servicing will continue.  I think that this financial innovation does create value as companies that specialize in it have done a better job than the vertically-integrated operations of major banks.

3. The industry will consolidate into fewer players.  The cost of regulatory compliance will limit the number of new competitors.

4. My thinking is that Altisource has executed very well compared to industry peers such as Wells Fargo.  Altisource didn’t allow squatters to live rent-free for years.  It didn’t engage in robo-signing.  And it isn’t facing a litany of lawsuits for improper behaviour (simply go Google “Wells Fargo mortgage lawsuit“).  In one instance Wells Fargo, the judge characterized Wells Fargo’s behaviour as “highly reprehensible” and issued a $3.1M fine.

5. Out of the publicly-traded mortgage servicing-related stocks, I think that Altisource (ASPS) will do better than Ocwen (OCN), Walter (WAC), and Nationstar (NSM).  Its share price has certainly outperformed its peers.

Does Management Have Integrity?

Operationally, I think that the company is very ethical.  They have not done anything illegal such as robo-signing.  And they work hard to keep mortgagers in their homes.

As far as management goes, one could make some arguments against Mr. Erbey’s ethics.  Some articles in the press have commented negatively on the fact that Ocwen overpaid for Bill Erbey’s Atlanta multimillion dollar home.  (An 8-K filing shows that Ocwen paid $6.5M.)  However, people deserve to be fairly compensated when they have to relocate for employment.  Mr. Erbey can’t exactly enjoy his Atlanta home while working in the US Virgin Islands.  The 8-K states that he will be working on setting up Ocwen Mortgage Servicing, a new subsidiary.  AAMC is also headquartered in the Virgin Islands while Altisource is headquartered in Luxembourg.

As far as the ASPS/AAMC/RESI spinoff goes, the spinoff slightly enriches Mr. Erbey due to his restricted stock grants at AAMC.  It’s kind of sneaky that Altisource is funneling profits into NewSource, of which AAMC will likely be the greatest beneficiary.  A small amount of wealth may be transferred from Altisource to AAMC.  Erbey will own more AAMC than Altisource.  Overall however, Mr. Erbey compares favorably to John Malone.  Malone’s spinoffs are far more complicated and craftier.  Malone takes steps to goad institutional investors into making mistakes; Erbey has not done that.

As far as insider compensation goes, it is reasonable.  According to the SEC filings, the directors range in compensation from $52,900 to $162,990 (Mr. Erbey is the highest-paid director).  William Shepro, the CEO, has had his compensation range from $1.4M to $4.4M.  His Altisource shares are worth about $30M ($96.16 X 311.327 shares) so he has plenty of skin in the game.  The level of compensation paid to insiders doesn’t seem that out of line compared to other public companies.  I believe that the value management has created far exceeds their compensation.


Accounting Tidbits

The depreciation method used by Altisource is fairly reasonable if not on the overly conservative side.  Most of Altisource’s fixed assets consist of computer hardware and software.  These are depreciated over 2-3 years.  It is highly likely that Altisource continues to use computer hardware and software that is over 2-3 years old.  These assets would be carried at a value of 0 yet have a market value slightly above that.  Altisource’s accounting looks very reasonable to me and I do not see any signs of overly aggressive accounting.  Unlike other companies, Altisource does not capitalize any internal software development costs.  (Capitalizing software costs will increase reported profits.)


Hidden Assets

The relationship with Ocwen is arguably very beneficial to Altisource.  In the short term, Altisource is guaranteed to grow as Ocwen has significantly increased its loan base.  Altisource owns Hubzu.com (formerly GoHoming), which is an online real estate portal.  The site is being opened up to third-party listings.  In theory, this property can provide serious competition to the traditional real estate model and their MLS (multiple listing service) systems.  This could potentially turn into a business with very high returns of equity if it becomes more popular.  Hubzu has many competitors in this space including RedFin.  Management may try to IPO Hubzu given that other Internet companies have been fetching high valuations in the past few years.


Hidden Liabilities

As discussed before, the deal with NewSource funnels some value out of Altisource.


Other Deals Between Altisource and Ocwen

Altisource has used $200M of debt (maybe around 2 years worth of earnings) to buy servicing businesses from Ocwen.  Ocwen acquired those businesses when it made its large loan portfolio acquisitions.

Considering that Mr. Erbey owns a greater percentage of Altisource than Ocwen, this deal will likely be fair to Altisource shareholders.


Capital Allocation

Altisource has stated their share repurchase policy in their 10-K:

"We seek to deploy excess cash generated in a disciplined manner. Principally, we will continue to reinvest excess cash in developing compelling services that we believe will generate high margins. In addition, we may seek to acquire a limited number of complementary companies that fit our strategic objectives. Finally, given the tax inefficiency of dividends, the low returns earned on cash held and our current belief to pursue a limited number of acquisitions, we believe one of the best ways to return value to shareholders is through a share repurchase program."

For the most part, they have done what they said they would do.  Altisource has been buying back its shares at prices lower than the current market price.  However, the part about “the tax inefficiency of dividends” doesn’t entirely make sense.  The ASPS/RESI/AAMC spinoff can be seen as a ‘tax inefficient dividend’ and caused shareholders to pay taxes right away.  It was not structured in a way that deferred taxes.  On the other hand, the spinoff should work out fine.  RESI was able to raise a very large amount of capital, driving new business to Altisource.  This will likely compensate for the tax inefficiency of the spinoff.


The Big Picture

Warren Buffett wrote in his 1989 letter to Berkshire shareholders:

"It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.  Charlie understood this early; I was a slow learner.  But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements."

I think that Altisource satisfies both criteria of a first-class business and a first-class management. It should be a business that will be able to compound capital at high rates for a very long period of time.

I believe that the mortgage servicing industry has good economics.  It does not have the boom/bust cycles of commodity industries.  And it does not face the risk of a technological shift that makes the industry obsolete (think phone book directories, bricks and mortar stores that compete directly with Amazon, etc.).  On the other hand, mortgage servicing is a very tough field considering that the major banks have done a bad job at it and had to pay settlements.  They may be trying to sell their mortgage servicing businesses because they are losing money at it.

Altisource’s management is excellent.  However, if management were to leave, I’m not sure if the company will continue to do as well.

Overall, I see Altisource as a very attractive growth business with low risk and a reasonable valuation.


Other Considerations

ASPS Versus AAMC

In theory, AAMC is ‘better’ than ASPS because ASPS is structured to drive title insurance business towards AAMC (in the same way that OCN drives business towards ASPS).  However, AAMC’s current valuation is ridiculous.

AAMC’s main assets are:

1. 10% of NewSource’s profits.
2. An agreement that entitles it to management fees from RESI.

At $270/share, AAMC’s market cap is a $632M.
At $17.55/share, RESI’s market cap is $400M (22.8M shares after the secondary offering).
At $96.16/share, ASPS’s market cap is $2,228M.

For $400M, you can buy RESI outright.  So #2 can’t be worth more than $400M.  This implies a valuation of >$232M for #1.  If 10% of NewSource’s profits is worth >$232M, then NewSource in its entirety would be worth >$2,320M.  >$2,320M is more than Altisource’s entire market cap.


Erbey's Insider Trading

Looking at Erbey’s trades, he has made small sales of ASPS and OCN while he has been making small purchases of HLSS.  I am not going to read too much into these sales and purchases.  Erbey had legitimate reasons to sell stock as he needed to pay taxes on the ASPS/AAMC/RESI spinoff as the spinoff was not structured in a tax-efficient manner.  Erbey also needed money to startup HLSS as he invested $10M in the HLSS IPO.  Underwriters like to see that company insiders have some skin in the game as it aligns their incentives closer to that of shareholders.  (Of course if investors were smarter they would probably just buy ASPS instead.)  Erbey’s open market purchases of HLSS helps to promote the stock and helps HLSS in raising capital.

Overall, I think that Erbey’s ownership of ASPS and AAMC will increase over time while his ownership of RESI, OCN, and HLSS will decrease over time

*Disclosure:  Long ASPS.  Not long AAMC, RESI, HLSS, OCN at time of write-up.


Thanks again to Glenn Chann for the write-up.  He is based in Toronto and is currently looking for a position as a junior analyst.  He can be contacted at: glennchan [at] gmail [dot] com

Lee Cooperman at the Skybridge Alternatives Conference (SALT 2013): Stockpicks & Market Thoughts

We wanted to highlight some notes from the Skybridge Alternative Conference, a.k.a. SALT 2013 taking place in Vegas this week.  Lee Cooperman of Omega Advisors gave his thoughts on the market and some of his holdings.


Market Thoughts From Cooperman

Cooperman says the market might be a little ahead of itself, the economy is limping along.  He doesn't see a reason for the market to decline a lot and says the only two ways that would happen is 1. a recession and 2. the market getting too frothy and the Fed removing quantitative easing.

The Omega Advisors man argued that the economic cycle could be longer than usual and also noted that many investors have de-risked since the financial crisis.  That said, he feels the market is ahead of the fundamentals.


Cooperman's Stock Picks

When asked where he would put new money to work today, he said he'd look to add to existing positions in his portfolio and singled out Monitise in the UK.  We highlighted Cooperman's Monitise stake before as it's a mobile wallet platform.

He also revealed he's been buying an engineering and construction firm Technip, involved in LNG platforms and after exiting Apple earlier, he's dipped back in around the low $400's in a "small size" position.

The Omega founder was asked about housing plays and noted he's missed the homebuilder trade, but has exposure via proxies like Ocwen Financial (OCN) and Altisource Portfolio Solutions (ASPS).  This week at the Ira Sohn Conference, Steve Eisman pitched OCN as a long.

Cooperman also touched on some other of his holdings that are trading below book value that he thinks are attractive:  American International Group (AIG), MetLife (MET), and Citigroup (C).

Omega also owns Facebook (FB) and they think people are underestimating the mobility opportunity and can achieve a much higher multiple.

At the SALT Conference, Cooperman was on the best ideas panel as well and said he likes Express Scripts (ESRX), the pharmacy benefit management company and Transocean (RIG), the deepwater driller.

Embedded below is a clip of Cooperman on CNBC from the SALT conference:



Lee Cooperman was named as one of the top 10 highest paid hedge fund managers of 2012.

Steve Eisman's Sohn Conference Presentation on Housing Plays: Long US, Short Canada

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Steve Eisman of Emrys Partners (he was previously at FrontPoint).  He presented "Housing: A Tale of Two Countries.  US vs. Canada."  


Long US Housing Plays

US: Fundamentals improving and accelerating. Affordability levels best in decades, Monthly principal and interest, only 14% of incomes. Inventory now at a 30 year low, shadow inventory is fading. Single- family starts should boost public builders. Last year was volume; this year is volume and pricing. California, AZ, NV, and TX are strongest- they were weakest.

3 ways to play it:

1. Homebuilders. Not cheap, but are not pricing in how much fundamentals have improved. Lennar (LEN), Standard Pacific (SPF), Pulte Homes (PHM).

2. Home building products: American Woodmark (AMWD), Fortune Brands Home & Security (FBHS).

3. Land: Forestar Group (FOR). Pure play in land. Colony Financial (CLNY) - real estate loans. Ocwen Financial (OCN) Largest non-bank mortgage servicing company. 25% FCF yield. Growth company, 7x p/e.  OCN seemed to be his favorite pick.  Our Hedge Fund Wisdom newsletter analyzed OCN back in our Q3 2012 issue.  Subscribe to the letter if you want a great company/stock overview to get up to speed.


Short Plays on Canadian Housing

He says that if a housing slowdown comes in Canada, the Canadian banks will really get hit.  "Misaligned incentives and poorly understood housing finance market."

Canada has their own Fannie Mae- called CHMC, which stepped in during 2008-2010 to do almost ALL the loans. Now CHMC is not doing loans, so banks must do it. Says these banks are all over-priced and "over-earning" because the boom from issuing insured loans is over. 

Canadian banks: Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM), Royal Bank of Canada (RY), Toronto Dominion Bank (TD).

Short Idea: Home Capital Group (HCG.CA). Listed only in Canada. Largest non-prime mortgage originator in Canada. Carries $8.8B on their balance sheet. Has less than $1B equity, yet 100% of the credit risk on those loans. Trades at twice tangible book, expensive.


We've highlighted some past resources on this hedgie, including Eisman's pitch on for-profit education as well as Eisman's thoughts on insurers.


Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.

Kyle Bass on MBS, Housing & Gold: Bloomberg Interview

We wanted to quickly highlight Kyle Bass' appearance on Bloomberg TV from last week for some of his comments on housing, the mortgage-backed securities market, gold and other topics.  The Hayman Capital founder also talked about Japan, his longstanding topic of interest.


On residential mortgage-backed securities: “That investment is working…The various concentric circles surrounding housing not getting worse, which is how we think about it. We are not expecting it to get materially better, just not to get worse. The services sectors, the new mortgage insurance companies, the things that are actually asymmetric investments you can make around the housing market not worsening are where the majority of our long side of our portfolio is.”

Just yesterday, we highlighted a piece from hedge fund Prologue Capital on MBS and the housing market which featured bullish comments on the industry as they see a recovery happening.

Bass mentioned playing mortgage servicers and these related bets have been popular amongst hedgies.  Our Hedge Fund Wisdom newsletter in the past has flagged that many funds have been active in shares of Ocwen Financial (OCN) and the like.

Turning to other positions Bass might potentially be involved with, Hayman disclosed an ownership stake in Realogy (RLGY) at the end of the fourth quarter.  The residential brokerage house completed its IPO during Q4.


On the future of Fannie and Freddie: “I have no clue…We decided to just exit, thinking about them when you meet with both sides of the aisle, they both want a bullet in their head. Typically when that happens you get a bullet in your head. The second thing we were thinking about, if you remember there was a proposal to start raising the g-fees. There is a way for the U.S. Treasury to get paid back all of the money they've pumped into Fannie and Freddie if they start raising g-fees."


On gold: “We have always had a position in gold. When you think about the largest central banks in the world, they have all moved to unlimited printing ideology. Monetary policy happens to be the only game in town. I am perplexed as to why gold is as low as it is. I don't have a great answer for you other then you should maintain a position.”


Embedded below is Bass' latest Bloomberg TV interview where he talks about many other topics:



For more on this hedge fund manager, we've also posted up Bass' short of Japanese Government Bonds.

Julian Robertson on What Stocks He Likes Now: Interview

Tiger Management founder Julian Robertson made his rare television appearance for the year on CNBC yesterday and talked about how now is a time to put money to work in the market.

He thinks the economy and overseas worries are having a big effect on investors.  So many investors are frightened about Asia and Europe that they've almost "lost their way" without realizing that many great companies are trading at great prices.

He feels that this market is good for hedge funds because their namesake allows them to hedge against uncertainty and these potential risks.  However, he worries that some managers have hedged too much and they won't benefit unless there's a big fallout in the world economy.


What Stocks Robertson Likes

Robertson cited Apple (AAPL) as great company trading at a great value, something he says rarely happens.  He said, "Apple is now probably somewhere around 14-15 times next year's earnings, it's very, very reasonable for the kind of growth you can get."

Facebook (FB) was another stock Robertson mentioned as he likes the social media exposure and admires Mark Zuckerberg.  However, he does not "really know enough about the stock" to own a position.  He cited "younger people" that he's in partnership with as having owned Facebook early on back when it was private.  We'd assume he's referring to Chase Coleman's Tiger Global.

Robertson says he's looking for great companies and he's invested in a European airway company: Ryanair (RYAAY) as they're the low-cost provider.  He also likes Rolls Royce (LON:RR or RYCEY on the pink sheets) because many people see it as a luxury automobile when in reality it is a great supplier to the aerospace and other industries.  Steve Mandel's Lone Pine Capital has been an owner of Rolls Royce.

In terms of financials, Robertson cited Capital One (COF) and Ocwen Financial (OCN).  The latter, he says,  is a mortgage servicing company that he thinks has a lot going for them.

Robertson argues that steel companies AK Steel (AKS), US Steel (X), etc are overvalued and we'd need to see the economy really takeoff to warrant those multiples.


Embedded below is the video of Julian Robertson's interview:



For more on this legendary investor, head to Julian Robertson's thoughts on the hedge fund industry past & present as well as his past extensive interview with Columbia Business School.

Doug Kass on the End of the Bond Bull Market: Value Investing Congress Presentation

Continuing our coverage, today we're posting up more notes from the Value Investing Congress.  Below are notes and the slideshow presentation from Doug Kass of Seabreeze Partners.  His talk was entitled, "The end of the bond bull market from an equity investor's perspective."

The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.  Kass quoted Warren Buffett: "Chains of habit are too light to be felt until they are too heavy to be broken."

Doug Kass argues that shorting bonds has been a great hedge against profits.  He says that shorting bonds might be the trade of the decade - to go against the grain and short bonds.  This is currently the largest position Kass has ever taken in his partnership.  Will Rodgers says that "You have to go out on the limb because that's where the fruit is."


The End of the Bond Bull Market

Example of risk of extrapolation:  Siegel stocks for the long run - labeled stocks safe for the long-term right about the top.  Howard Marks: "extrapolators fail to understand that things mean regress. And crown wrong at extremes."

BusinessWeek - "Death of Equities" was right at the end of the lost decade of equities and then the market gains 18% per year after the article was published and then did 19% annually for the next 20 years with only 2 down years.

Key Factors to the Short

- Flight to safety premium erodes
- Muddle through economy gains steam
- Fed policy on hold - leads to natural price discovery
- Inflation on ascent
- Housing recovering (thinks housing could add 1% to US GDP next year)
- Stocks vs bonds approaching reallocation trade
- US fiscal imbalances are not being addressed

Simple observations on the 10 year:  stock market 2% return is 50x earnings. Pay 40% to Uncle Sam - after tax yield is 1.2% and with inflation at 3% it's a negative real yield.

Real GDP 2.5 and inflation of 2% = 4.5% with current yield of 1.9% - "tons of daylight in the middle."

He also discussed Ocwen Financial (OCN) - subprime mortgage servicing.  Banks are getting out of servicing and outsourced portfolio solution $12 at spin in 2009 to $60.  Trades at 15 and will earn $2 per share in 2013.


Embedded below is Doug Kass' slideshow presentation on the end of the bond bull market:




Be sure to click here for other presentations from the Value Investing Congress.