Pacific Sun (PSUN) – overvalued and losing money

PacSun is an apparel retailer that targets the fickle teen market.  I’m going to keep this post short and simple.  Since Gary Schoenfeld became CEO in June 2009, PacSun has been consistently losing money.  The CEO has had 3-4 years to turn the company around.  A good CEO would have turned around the company by now.  Of course, PacSun continues to report losses.  If the future resembles the past, then this company will continue to lose money and go bankrupt in a few years.  In YE2013, the company had GAAP losses of 77 cents/share versus a book value of 95 cents/share.  While the company has a lot of debt ($1.17/share at YE2013), the debt is probably not that dangerous as most of it matures in 2016 and (as far I can tell) doesn’t have financial covenants.

Market cap: $273M
Earnings yield: -22%
Price/book: 6.87
Short % of float: 15%
Short % of outstanding: 8.2%

*Disclosure:  Short PSUN common stock.

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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.