Year in review 2014

In 2013, Altisource was the best performing long position in my portfolio.  In 2014, I unfortunately made it the largest position in my portfolio.  Because of that, I am badly lagging the market.

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Kobex Capital: Insider buying continues

Kobex Capital (formerly Kobex Minerals) has a market cap of $23M and is traded on the TSX Venture.  It is a pile of cash (and 1 stock) trading at a very obvious discount to liquidation value.  I’ve written up the company in the past.  Paul van Eeden continues to buy shares of the company via Cranberry Capital, which is a joint venture between van Eeden and Altius Minerals.  It’s possible that the end game is a liquidation of the company if the share price continues to be depressed.  This is because Altius Minerals may eventually wish to withdraw money from Cranberry Capital to pay down its debt.

kobex-insider-buying-continues

I think what will happen is that van Eeden will continue to buy shares of the company on the open market.  If the share price stays low, I think that a liquidation will eventually happen because it will be easy money for Cranberry.  If the share price goes up, then investors can flip their shares for a profit.

*Disclosure:  I am long KXM.

(OCN/ASPS) Ocwen settles with the NY DFS, Erbey steps down

Ocwen has reached a settlement with the NY DFS on onerous terms.  Highlights are:

  1. Bill (William) Erbey steps down from every single company in his empire (OCN, ASPS, AAMC, HLSS, RESI).  It’s unclear to me whether he decided to join his wife in retirement or whether he was forced out.  I suspect that it is more of the former than the latter.
  2. Ocwen will eventually be able to buy more MSRs though it does not look like this will happen in the short term.  Firstly, NY DFS must appoint an Operations Monitor.  Then, the Operations Monitor will develop a set of benchmarks to measure Ocwen’s capability in boarding new MSR portfolios.  Once Ocwen can demonstrate that it can meet all of the benchmarks, Ocwen will be able to board new MSR portfolios.  Future servicing transfers are conditional on the NY DFS’ approval.  Its approval is “not to be unreasonably withheld” according to the consent order.
  3. The cost of servicing will go up due to more regulations.  For example, Ocwen must provide credit reports to borrowers in New York state if their credit was negatively impacted by Ocwen “regardless of whether such borrower’s loan is still serviced by Ocwen”.

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CONN Q3 2014 earnings: More pain to come?

After Conn’s released its earnings, the stock fell by roughly two fifths from $35.09 to $20.83.  The market was presumably spooked because credit losses were fairly high relative to expectations.  While management has previously stated that the aspirational goal for static loss rates was 8%, it looks like Conn’s may exceed that for 2013 and 2014 vintage originations.  Refer to the static loss tables in the 10-Q (page 32) and make your own extrapolations.

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Liberty Broadband rights: Don’t trade deep-in-the-money derivatives

Liberty Broadband is issuing warrants in its rights offering.  Personally, I would be very careful/hesitant about trading those rights.  There is an arbitrage between the rights and the common stock.  This is the kind of arbitrage that high frequency trading is really good at exploiting.  Suppose that the common stock moves 30 cents in less than a second.  Any limit orders for the rights might be trading at the old price 30 cents away.  Somewhere in that time window, it is possible for somebody with a very fast trading system to calculate the correct value of the rights (which is a deep-in-the-money warrant) and pick off any old orders trading based off of slower quotes.  If very few investors trade that particular deep-in-the-money derivatives, there will be adverse selection.  If your order fills, you will likely be trading with a market maker or HFT who is ripping you off.  For good order execution on derivatives, you want to be trading with other investors and not HFTs.

My rule of thumb is to never trade deep-in-the-money options/warrants.  The way I would avoid being on the wrong side of the arbitrage is to trade the common shares instead of the rights.

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Avoiding bullsh**ers

I try to avoid management teams that deceive their investors or make excuses for their performance.  Usually, it is because:

  1. Management is trying to promote the stock.
  2. Management is not very good at their job and don’t want to be fired.  Or, the CEO earned his position due to skill in office politics rather than operational skill.
  3. Management is delusional.
  4. Management knows that the future is not bright but doesn’t want to admit it.

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Money managers and their ability to spot scams

Looking at the ability to spot scams is one way to figure out which money managers are skilled or unskilled.  Warren Buffett has invested in surprisingly few scams.  I believe this is because he looks for integrity and invests in businesses that he understands.  His ability to avoid scams is especially interesting because he does not perform traditional due diligence when buying private businesses.  He does not hire accountants to comb over the books of businesses that he buys.  Nor does he have a team of analysts to perform due diligence.

On the other side of the coin, unskilled managers tend to get burned by scams on the long side and to miss out on opportunities in shorting scams.

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