AV Homes (AVHI)

This company is a mess but it isn’t as overvalued as some of the other homebuilders.  So, I don’t think it’s a great short.

Hovnanian (HOV)

Hovnanian has a huge mountain of debt that it is trying to outrun.  Management has been diligently extending maturities on Hovnanian’s debt and raising capital through secondary offerings.  My short thesis is this:

1. Hovnanian is overvalued if you were to sell off all of its assets.  Its market cap is $760M.   Book value is -$478M (yes, that’s a negative sign).
2. It’s losing money.
3. They are one of the worst managed homebuilders so they will likely continue to perform poorly in the future.

Altisource (ASPS) – Updated writeup

(This post is featured on Market Folly, a blog that tracks what top hedge funds have been buying/selling and why they do it.  Check it out!)

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 (see gurufocus.com for 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.  Its forward P/E is roughly 11.8 (according to Yahoo Finance).  I believe that Altisource is the best managed mortgage servicer in its field.

Comstock Holding Companies (CHCI) – The living dead

Comstock is a distressed homebuilder that defaulted on most of its debt in 2009.  It allowed many properties to enter foreclosure while it worked with its unsecured lenders to re-negotiate/amend its debt.  Currently, the company is still in a precarious position.  It is effectively borrowing money at 20% (from insiders and private investors) while it tries to convert its inventory of land into cash.

Over the past few years, it has been unprofitable and has seen its revenues decline.  Since 2006, every year has been GAAP unprofitable except for 2011 (where the company was profitable because it won a lawsuit).  Comstock trades at a price to book ratio of 8.74 (higher if you take out capitalized interest).

Skimming DEF 14A filings

DEF 14A filings on the SEC’s EDGAR system are worth reading alongside the 10-K.  They provide information on insider compensation.  They are extremely helpful in figuring out the level of management’s integrity.

US Homebuilders: Time to Short Them?

In the past 12 months, homebuilding stocks have jumped in anticipation of a rebound in housing prices.  So far, the rebound hasn’t even occurred yet!  Home prices have stayed roughly flat since 2009.

While I don’t think that I am any good at predicting future home prices, it seems to me that some homebuilders are overvalued.  There are some homebuilders trading well above their book value despite being unprofitable.

What gets measured gets improved… or not

On the surface, it seems that measuring key metrics for a business can lead to improvements.  Many businesses will try to quantify their operations instead of relying on qualitative goalposts.  This is probably a good idea in most situations.  However, the real world is messy and difficult.  Sometimes employees will game the metrics used to measure their performance.

Gold versus gold mining stocks

GLD is a trust that owns physical gold.
GDX is an ETF index of gold mining stocks.

As you can see from the chart below, GLD has clearly been the better performer since the inception of GDX.  (GDX would perform better if dividends were taken into account.  However, it still wouldn’t make a difference.)

In my opinion, gold miners have spent way too much effort on mining the capital markets (e.g. you, me, your pension, etc.) and on chasing projects with terrible returns.

KWG/NOT update – Cliffs’ Black Thor project has bad economics

A year ago, Cliffs put out some information on the economics of its Black Thor project in its Investor’s Day presentation by Bill Boor (see Cliffs’ website).  I’ve only stumbled across it and read it now.  In the figures given out in the presentation, there are some extremely aggressive price assumptions used and the stated IRR is only 14-17%.  The projects’ economics are overstated and this project doesn’t look economic at all.  I wish I had realized this sooner.

Now I’m in an uncomfortable position with KWG Resources and Noront.  Both their fortunes are tied to Cliffs building a mine and smelter that it shouldn’t.

Osisko (TSE:OSK) – Yet another promotional gold miner

Originally, I was interested in Osisko since it has dropped by three quarters since 2011 and it seemed cheap.  However, the company consistently uses aggressive accounting so it’s not as cheap as it seems.  Overall, Osisko is hard for me to evaluate since (1) I don’t trust the promotional management and (2) there isn’t enough information being disclosed.  I also prefer to invest in management teams that are really good at generating value.