An Alternative Portfolio Insurance Policy
By Glen Bradford
What Does Portfolio Insurance Mean? “A method of hedging a portfolio of stocks against the market risk by short selling stock index futures.”
Let’s settle for just hedging against market risk. Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.
So let’s assume that the stock market goes down 50%. Granted, this is unlikely to happen with the seemingly inevitable monetization of the deficit. What’s going to happen to the foreclosure market? Do you think more people will be able to afford their homes? Do you think that interest rates can get any lower to finance homes at lower monthly payments? Do you think that the economy would improve? Probably not. All signs point to more foreclosures, short sales, etc. The only way that I see out of this trap is to print enough money to justify these higher prices. We’re on that road but it’s going to take a while.
While we wait, I advise taking a look at default, foreclosure, short sale servicing companies to hedge against the market risk. Fannie Mae (NYSE: FNMA), Freddie Mac (OTC: FMCC), and Bank of America (NYSE: BAC) are going to need these services badly. As for right now, it is my understanding that there are temporary industry-wide problems. Rumors indicate a mortgage moratorium that is supposed to end by the end of Q3.
The Dolan Company (NYSE: DM) is trading with a forward P/E of around 9.10, suggesting earnings are going to increase over 50% YOY. They acquired DiscoverReady in November of last year and in my opinion historical operating income instead of historical net income should be used to forecast the future in this case.
Altrisource Portfolio Solutions (NASDAQ: ASPS) is trading with a P/E above 20, is getting upgraded by analysts, and recently acquired The Mortgage Partnership of America (MPA). That said, note the rough $3.2M in EBITA that was acquired through the MPA and the more than doubling in properties under management from January through March of 2010.
Lender Processing Services (NYSE: LPS) just pulled off a growing quarter amidst a quarter impacted by sluggish industry trends. Trading at an estimated P/E of 9.10 for 2010 makes this one inexpensive as well.
DJSP Enterprises (NASDAQ: DJSP) recently captured Richard D. Powers from Altrisource. They’ve also been pummeled down over 60% from their 52-week high, have over 1.4M shares short, have lowered their 2010 guidance, and by my metrics are trading at a forward P/E of 3.8.
As home prices go down, insuring your home becomes less expensive. As stock prices go down, buying an insurance policy the traditional way becomes more expensive. You can play the traditional game or you can come up with one that works better. I remember my trip to the Chicago Board Options Exchange (CBOE) specifically for the cognitive disconnect described above.
Disclosure: Bradford was long DJSP Enterprises at the time of publication.
So, from an investor standpoint, the catalysts now include:
1. 1.4Million shares that Shorts need to buy
2. I believe Stern still has some buying power out there, and he was buying as high as $6.33
3. Timios Acqusition (at this point the acquisition is priced to fail)
4. Two unmentioned banks ramping up their merged foreclosure processing (which is odd because publically these banks reportedly finished merging in December 2009 — where one of my cynical investing friends suggests that DJSP has lost them as a client — that’s the negative side)
5. Q2 is over
6. The ending of the mortgage moratorium (120 days max started like… 2 months ago I think?)
7. Q3 is on
8. Potentially Signing an REO Client
One detail though I would reiterate, DJSP has not lost the client in question. (As far as I can tell).
Disclosure: Bradford was long DJSP Enterprises at the time of publication.