Why Altisource Residential Corp. Shares Need Repairs Today

Is this meaningful or just another movement?

Jun 23, 2014 at 5:22PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Altisource Residential (NYSE:RESI) have stabilized at a loss of roughly 7% in afternoon trading after bottoming out at an 11% plunge shortly after lunchtime. The drop occurred after Altisource lost out on a Department of Housing and Urban Development auction for $3.9 billion worth of nonperforming home loans. Altisource's portfolio manager, Altisource Asset Management (NYSEMKT:AAMC), was hit far harder, and has lost nearly a quarter of its value today.

So what: Bloomberg reported that 27 investors submitted a total of 163 bids for this block of loans. However, this was the first time that a single bidder -- private equity firm Lone Star Funds -- won the entire pool, which it accomplished by submitting very aggressive bids worth roughly 78% of the current price of the mortgaged homes on the block. This is quite a bit above the 69% range in which Altisource had won earlier bids on nonperforming home loans.

Now what: Altisource's business revolves around acquiring precisely this type of loan, but it's unlikely that it would have acquired even half of the loans had it won its bids, since its balance sheet currently records only $1.77 billion worth of mortgage loans. While this bid represents a spike in bid values relative to earlier auctions, it could very well be an outlier, as there are typically multiple winning bids. While such bids have risen relative to home values over the past two years, they were still a fair bit below what Lone Star offered in the latest auction.

There will be other auctions later this year, and Altisource still has plenty of chances to get better deals than Lone Star got today. It hardly seems right to panic when the bad-loan supply is plentiful. In fact, since Altisource Residential is already up nearly 75% over the past year despite boasting a P/E below 12, this might be better viewed as an income investor's buying opportunity.

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