Quick commentary by Ocwen shareholder John Devaney of United Capital Markets (unedited):
Yesterday Ocwen Financial Corp ( NYSE: OCN) declined 13%. I continue to be a substantial holder of Ocwen Equity and supporter of the company and their future prospects.. I’ve followed the “trade flows”, news, and the fundaments for almost two years now. I continue to be very bullish of the prospects for gains in the share price and below I have decided to offer up my views on what I think caused the large share price decline yesterday.
#1 Trigger – Compass Point Research yesterday raised their price target on Ocwen from $5 to $5.5 however they downgraded their outlook from “BUY” to “NEUTRAL.” This is one positive and one negative thing. I’m not sure why this triggered this “short attack” I discuss below.
#2 Large build of short interest in 15 days ending 12/31/2016. As you can see from the table below, the last 15 days of the year saw short interest build up by 2.5mm higher to 15.8mm from 13.2mm. The only other jump this big was the 15 days following the s/p upgrade.. This short interest would either be increased by “market makers” or short investors ( mainly hedge funds). We might have expected the short interest to have gone up after the prior “Piper Jaffrey” sell report in October but OCN’s earnings wound up posting a 9mm profit against expect loss of over 60mm so those “short attack” sellers who shorted from $4.10 to $3.5 seems to have covered within the 15 day period. As the next bullet point highlights, the short flows the day or two after the Piper Jaffrey “SELL” report were very high. Since short sellers and market makers are short term investors ( opposed to most OCN holders are Long Term investors) it’s important to study the flows and see if these short term investors are moving the share price around and if so are they right or wrong in their assumptions to sell short.
#3 Yesterday short flow data – highest since the Piper Jaffrey report short attack day.
Short flows yesterday were 2.5mm up from 273k and 130k the two days before. The only other days in the last 6 months that have come close to these types of flow numbers were 3.3mm short the day of the 10/27/2016 negative “Piper Jaffrey” SELL report came out and also there were 1.9mm shares shorted the day of the S/P upgrade on 08/10/2016 date. (Keep reading far below graph)
Commentary on short flows.
a.) s/p upgrade day. There were likely large short flows on his day as buyers were lifting offers and the market makers likely got caught short as the price quickly went up and this shorting was like not as deliberate.
b.) The 3.3mm shares that got shorted on the 10/27/2016 Piper Jaffrey negative “sell” research report were deliberate. These short sellers were hoping that Piper Jaffrey was right and that OCN would have bad earnings just a couple days later and they would make money. What really happened was that a couple days later, Ocwen reported a 9mm profit when consensus from all research firms predicted a 60mm loss.. The price of the stock rose as the LONG BUYERS and new buyers added to the equity and the short sellers, as the table above shows, covered the large short flows of 3.3mm shares between about 3.80 and 4.36 when their average short cost basis was approximately $3.75 by my calculations based on the vwaps ( weighted average price) on those days. In this cvase, they shorted over 2 days and covered over three days before the end of the month.
c.) Yesterday, it seems as though this Compass Point report, that was not overly negative, ( they raised the price target from $5 to $5.5) was the trigger for this 2.5mm share short attack. It’s no surprise that these short sellers want the price to go down so they make money and item #2 above does show a build of the short interest of 2.5mm in the last 15 days of the year to over 15mm shares short. This is up from 8mm shares short just before the S/P upgrade. I’ve noticed that directional flows ( buying at the market or selling short at the market) really creates 2 trades for every directional trade that’s being done. The reason is that the shares are bouncing around between the market makers. For example if you bought 1mm shares you might create 2mm of flows for the day. So I estimate that the 2.5mm shorted shares created 5mm of volume on a day when the volume was 8mm. It’s no surprise that the OCN price went down 13% on the day similar to the move on the Piper Jaffrey short attack day when 5/8ths of the volume yesterday was this short attack.
#4 CEO, Ocwen à Ron Farris I had positive call this week
I touched based with Ron this Monday for about half an hour. A few of the things that impressed me were the fact that Ron had not taken a single day off in December and has been working very hard on continuing to grow/improve Ocwen. Ron is a very hard worker and I have grown to like and trust him. He seems very happy with how last year unfolded especially extending the bank debt and corporate bonds. The next phase now for Ocwen is going to be growth. I think he might be a little disappointed that they did not settle with California before the end of the year but as Ron told me – its more about having a positive long term relationship with the regulators for many years. By my estimations, OCN has “over accrued” for the California issue by about 7-10mm meaning if California doesn’t settle and the Monitor ship ends in June on schedule they will wind up paying less than the accrual. He was saying their goal is to “grow originations” even into a higher rate environment as they are not that big now and they are focusing on FHA loans ( lower fico) and as previously discussed they are now finally targeting refinancing loans in their “private label bond” servicing portfolio.
#5 Q4 results – results are going to be very positive ( my opinion)
I know for sure based on work I did that Ocwen will reverse 47-49mm of previous “mark downs” on the agency servicing portfolio “mark to market” requirement provided the 10 year Treasury stays over 2.18. I am figuring they are probably going to earn 20mm to 30mm up from the 9mm they earned last quarter plus this 49mm. This could be a 70mm net profit blow out quarter for Ocwen. I’m not sure why on Earth these shorts want to short more and make this attack when earnings are now less than 30 days away and are expected to be a blow out. Shorts might be filing more on creating a big price move trying to get long investors to get nervous and