Don’t Fret This Ocwen Short Attack

Don’t Fret This Ocwen Short Attack
Ocwen Financial Corporation

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.

Exclusive: Voss Value Launches New Long Only Special Situations Fund

Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More

#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 sell to them.

#6 Buying Opportunity

I Think The Back Up In The Share Price Is  Going To Wind Up Being A Buying Opportunity

I wrote my  27 page paper last year about 4 months  ago and much of my thoughts and  perspective  have come true.    My price  target in my paper was $6.75 for the end of 2017.    This was based on Ocwen earning $1/sh or more in 2017 which I feel is  going to occur.    There are still over $5/share in off balance sheet assets that Ocwen owns that are marked at zero in the balance sheet and 2017 likely is going to wind up seeing these assets contribute to income and/or get more clarity on their values.   I think the $6.75 end of the  year target is likely going to wind up being on the conservative side and  I would say $7.75 is more likely.

Ocwen remains the  #1 servicer of  subprime loans in the US.   Their  MODS have benefited RMBS bond holders the most over any servicer and these investors now make up a decent composition of the Ocwen equity and corporate bond holders.

This year, I’m hoping to see the  addition of some very experienced  new board members that will bring continued credibility to improvements in corporate  governance.   The landscape in servicing and originations for Ocwen is just  getting better and better.   Walter a competitor of Ocwen has been in the market selling mortgage  servicing assets.  They are likely to continue to sell assets into the  future to raise cash to honor paying down  their large corporate  debt.    PHH, another  competitor in servicing and origination, has pretty much announced a liquidation and has already sold some of their assets.    Ocwen is in a good position to potentially acquire assets over time consider Ocwen continues to have just one unit  of debt and one unit of equity when their competitors have more like 3 units of debt and one unit of equity.   There likely is  going to be  growth in the mortgage servicing portfolio once the  regulators ( who Ocwen seems to have won over like the  rating agencies) give them the  all clear.

Have  a great year!!   Don’t fret this short attack.    If anything, this gives a very good opportunity to buy shares at this lower level and I recommend adding on or creating new position.

The last few short attacks have now proven to have been “wrong” and these short sellers were forced to cover at higher prices  which I feel is going to keep a good bid under the share price  for this next year and happen again after this attack.


John Devaney

Article by OozingAlpha

No posts to display