Keeping an Eye on Some Mortgage-Related SmallCaps

Posted On February 18, 2009 | by AllenCaron

When the market drops on big volume, it is said that sellers are driving the prices down, but it is always a good idea to remember that someone is buying whatever is being sold — which means that virtually an equivalent number of buyers is betting on making money while sellers are heading for the hills. 

The same is true of the housing-driven financial implosion we have all been reverberating from for the last many months.  Most of the eyes that follow these things have been focused on the big, prominent companies, most of which are large-caps (or were large-caps), and therefore outside our purview.  That would include Countrywide, formerly the largest independent, and now a wing on the Bank of America estate.  It also includes news hogs like Freddie and Fannie, and all the big banks that got whomped when the bottom fell out of the housing market.

But in every situation like this, there are winners as well, and opportunities that tend to go largely unnoticed by the mass of investors.  We have been keeping an eye on 4 companies that have been out of the headlines, and that may stand to grow as a result of the restructuring of the American dream of home ownership.

First up is West Palm Beach-based Ocwen Financial Corp (NYSE: OCN, http://www.ocwen.com/), which is trading today at $8.85, up $0.20, vs a 52-week range of $3.66 to $9.54.  Average volume is over 400,000.  Ocwen provides business process outsourcing services to banks and financial institutions — meaning that they help with mortgage loan servicing, collections, foreclosures, title services, etc.  In other words, the more houses that enter the queue, the more business there is for companies like Ocwen.  For the third quarter of 2008 their net was up 161% over the previous year, and their year-end earnings are due to be announced on March 12, 2009, with a conference call that you can tune into.

Next, have a look at Walnut Creek, CA-based PMI Group Inc (NYSE: PMI, http://www.pmigroup.com/).  PMI provides a variety of mortgage-related services and products, including mortgage insurance, structured-finance services and securitization services in the US and abroad.  PMI has had a hard time, with declining revenues mounting losses and credit-rating downgrades, and as a result its shares are selling at the cellar-level of their 52-week range: $1.18 vs a 52-week high of $8.34.  They liquidated some Pacific-based operations recently, and their market cap is under $100 million.  Still, as sales of houses increase (which they have been — in quantity, not in price), there is a market to be served, and PMI may be a player to watch.  We remind you that we do NOT make recommendations as to investments — we just write up companies that interest us.

Third up is tiny, largely unknown Las Vegas-based Liberty Capital Asset Management (EBB: LCPM, http://www.libertycapital.com), which has the most intriguing business plan of the bunch.  Liberty Capital owns the mortgage paper on about 5000 homes, largely in the Rust Belt of the upper midwest, and those mortgages were bought at, well, apparently VERY attractive discounts.  They are restructuring the paper to make sure that the mortgages return to “performing” status (all are impaired currently).  This is being done without government intervention, and the success rate may be quite high.  We are told the strategy is scaleable, and that management is considering taking on additional portfolios of mortgages to be restructured.  The strategy is that if you buy deep-discounted paper, you have a lot of leeway to work with the homeowners so that everybody wins.  Liberty Capital reversed into a shell last year, and has reported little in the way of results as a public company.  The stock is being quoted today at $0.74 vs a high of  $1.01 for a market cap of just over $5 million, but the volumes are so low that individual sales may not be meaningful.  Insiders own most of the stock. 

Finally, have a look at Philadelphia-based Radian Group Inc (NYSE: RDN, http://www.radiangroupinc.com/), which provides credit insurance, not only mortgage-related, but, for instance, to municipal bond issuers.  It is not a newcomer, having been founded in 1977 (used to be called CMAC).  Last week Radian declared a regular quarterly dividend that is very small but better than a hit in the head ($0.0025 per share).  Their YE 2008 results are due on February 24, with a conference call to follow.  Shares are trading on the NYSE today at $2.70, up $0.10 vs a 52-week high of $8.74 and a market cap of about $219 million.  To be fair, we should point out that just yesterday Moody’s totally trashed their debt rating from A2 to Ba3, which is a “junk” rating.  It does not seem to have destroyed interest in the equities however.

Do your own diligence, please.

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