Monday, July 02, 2007

Recent Events

It's been a relatively slow week with not much to post about. Here are a few updates to keep in mind. First, I've been invited as a guest contributor to Reflections on Value Investing, a daily blog dedicated to collecting and posting great reading material relevant to value investing. So rather than post every good article I come across here, I encourage you to make a daily stop at Reflections and read the posts from me and the other great contributors on the site.

Second, back in January I mentioned that the Value Investors Club report on Interoil was a great example of investment analysis. It spelled out various reasons why the company was worth considerably less than its stock price of $23. Well, since that time, the stock has appreciated to a high of $44, before dropping precipitously in three days to $19. Today, the stock is up 26% on news realeased by the company that the price drop is "an overreaction". As Buffett has said, shorting is never really a fun sport. It is difficult to get shares (i was never able to sell it short through my broker), the interest can be high, and the stock can stay irrational longer than you can stay solvent. And to top it off, you are going against insiders that are doing what they can to inflate their stock price. So if you are going to be short a company, be prepared for an emotional roller coaster.

And finally, some food for thought: American Home Mortgage, an Alt-A loan originator, recently withdrew its guidance for the year and said it expects a loss because of a large influx of warranty penalties. To clarify, when most loan originators sell a loan to an investor, they usually include a warranty that the loan will not go delinquent within the first three months, or otherwise the company will buy back the loan. Those following the subprime fiasco know that this was the cause of the downfall of New Century and several other lenders. (Delta Financial, on the other hand, has so far avoided this) The question is, if loan underwriting has gotten so bad that many loans are going bad in three months, how much better could the loans be that they wrote 6 months, a year, two years ago? The question is important considering subprime and Alt-A combined made up 40% of 2006 loan originations, and many loans written in the last few years are set to reset in the 07-09 period.

I am adding to an old position, and there will be a more detailed write-up on the company soon.

No comments: