Michael Spacey's  Instablog

Michael Spacey
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This is a pseudonym. Started my career in structured finance, moved into corporate debt, and now equities. My investment style is focus on the fundamentals and figure out what the company is worth. Writing is a way for me to gather feedback and information, rather than convincing someone else to... More
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The Cleanup Call
  • Reduced My Position In STC Last Week 0 comments
    Apr 6, 2014 9:49 PM | about stocks: STC, OCN, HLSS, PHH, FNF, AGNC, ARR, ANH

    Reluctantly. STC has much going for it - activist investors pushing for more transparency (in a company that previously don't even hold conference calls) Concrete plans to cut cost. An excess cash/capital position with strong repurchase potential. At the end however, all that could be overwhelmed by industry weakness.

    STC has always been a speculative play for me. Not only are title volumes highly cyclical, but high fixed costs + low margins = maximum upside from a cyclical upswing. Even within the title insurance sector, STC was the best bet due to its high percentage of purchase volumes (refis have lower margin). That thesis played out well last year and STC was able to grow despite the industry decline in refinancing volume.

    In a down turn however, the operating leverage goes the other way. With 1Q14 set to be an ugly quarter, 2014E pretax earnings could easily be down 20% despite cost cuts. It's obvious that refinancing volumes are not about to recover anytime soon, but now even the purchase volumes are showing weakness. The MBA purchase volume at 1Q14 stood at 176, down -17% from 212 at the end of 1Q13. It's not totally the weather either.

    I will need to see signs of improvement in mortgage volumes to jump back in. STC can do better than the industry because of its exposure to Texas, a high growth market, but I just don't have the data to reach a conviction (if someone does please let me know). In the meantime I'm still very much invested in other parts of the mortgage market:

    • OCN: long positions (short put + long stock). I'm looking past the regulatory pressures but these guys need to focus on improving customer satisfaction.
    • HLSS: yield investment.
    • PHH: an asset play with activists agitating to split up the company
    • FNF: another title insurer (and like STC a smallish position for now) but more of a long term investment with its dominant market position & LPS. Tracking stock provides upside.
    • AGNC/ANH/ARR: with new issue mortgage supply dwindling I expect yields to remain low. These mREITS are still trading below book value so there's a margin of safety.

    So my mortgage/housing portfolio feels like a bunch of cigar butt plays. Not happy with it but I guess that's just the state of this industry …time to diversify a bit.

    Stocks: STC, OCN, HLSS, PHH, FNF, AGNC, ARR, ANH
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