Ways to Play the "Housing Boom" - Title Insurance

Submitted By Trader Mark
I have been struggling to find ways to play the refinance "boom" outside of Bankrate.com (RATE) which we mentioned December 3rd [Dec 3: Mortgage Applications Spike to Record] While I believe purchases of homes (ex - foreclosures) will continue to di sappoint bulls, along with the % of refinance applications actually being approved - 5%, 4.5% and potentially even lower interest rates that the government will eventually take us to are going to have some effects. Foreclosure are now close to 1 in 2 sales in the entire country so at 50%+ listed price some volume of sales should occur. My problem with Bankrate is the advertising issue as I outlined earlier in the month

One interesting name if you want to game this thesis is Bankrate.com (RATE) which is a site I like to use myself - it is a comparative tool for mortgages, credit cards, et al. There is a catch 22 there though because advertising is one thing that gets cut very heavily in a recession and this site is based on advertising revenue - but traffic should be hopping with all these people who can pray to re-open their personal ATM.

The stock was under $33 when we mentioned it and has had a good month, now nearing $37 and facing a very important resistance area - the 200 day moving average. (just under $38) - again the chart below does not coincide with the charting I use - in the chart below it looks like RATE has broken above resistance.

Over at Realmoney.com a commentator (more of a trader than investor) has a piece about the strength in title insurance, and sure enough we have a group of 3 companies who have made tremendous moves of late and any "rebirth" of the housing market would be a boon to them. Barron's also had a piece out on this sector mid month.

THE STUBBORN STORM CLOUDS over the real-estate market could be giving way -- thanks to falling mortgage rates. In the last week of November, mortgage applications jumped 112% from the prior week, according to data from the Mortgage Bankers Association. Refinancing activity rose at an even greater clip.
This trend bodes well for shares of companies that sell the title insurance required with any mortgage. The three leaders in the industry -- Fidelity National Financial (ticker: FNF), Stewart Information Services (STC) and First American (FAF) -- are all worth considering.
All three were punished as the credit crisis took a toll on real-estate transactions. Stewart and First American are each down 60% from their year highs, with Fidelity National off about 40% from its 52-week peak.
Talk of a rebound might be premature but the reduced prices could be a good entry point for investors; the title insurers' services will be required once buyers and liquidity return to the marketplace.
Unlike many companies in the real-estate universe, title insurers' revenues are less reliant on the recovery of home prices. Instead, the firms' sales are driven primarily by increased transaction volume, which should ramp up early in the recovery process. "Versus everyone else, they are certainly at the front end of increased real-estate transactions," says Keefe, Bruyette & Woods analyst Nathaniel Otis.
Buyers and mortgage lenders both pay one-time fees to the title insurers, who perform due diligence on a property. At closing, the companies issue a notice of a "clean title," insuring the property against conflicting claims of ownership.
Evergreen Investments, which owns shares of Stewart and Fidelity National, estimates that stable 5.5% mortgage rates could drive $2.5 trillion in mortgage activity for 2009, up from $1.8 trillion this year. In that environment, title insurers could see $14 billion to $15 billion worth of billable revenue versus $10 billion in 2008.
If the Treasury Department is able to push rates to 4.5% -- per its recent proposal -- that could drive even more activity.
"If that happened, it's quite scary the earnings number Stewart would produce," says James Tringas, senior portfolio manager for Evergreen's Special Values Fund. With a full year of 5.5% rates, Tringas says, Stewart could see earnings per share in the $3 range. In that circumstance, Tringas says an earnings multiple of 10 times would not be unreasonable. That offers 50% upside from Stewart's Wednesday close of $14.96. (For 2008, analysts expect a loss of $5.43 per Stewart share. In 2003, when mortgage originations totaled $3.8 trillion, Stewart had EPS of $6.88.)
"The sector is interesting to the extent somebody believes we may be near or at a floor" for mortgage originations.
Any improvement in the mortgage market likely won't help title insurers until the first quarter -- the companies don't get paid until real-estate transactions close, as much as 90 days after an initial mortgage application.
Observers are cautious about drawing too much from the latest data. "There have been a couple of head fakes on that already this year," says Mark Dwelle, an analyst with RBC Capital Markets. The Federal Reserve's January rate cuts, for instance, sparked only a short-lived surge in mortgage applications.
... after LandAmerica Financial Group, the third-largest title insurer, filed for bankruptcy and sold its title subsidiaries to Fidelity National. The consolidated market is expected to help the remaining players take new market share. Following the acquisition, Fidelity National will have about 45% of the market for title insurance. First American has 29% and Stewart controls another 12%.
Fidelity National could be the safest of the title insurance plays. The stock is down 36% from its February highs, but just 9% year-to-date. At $13.31, the stock trades at 1.6 times the company's tangible book value. Investors have been willing to pay a premium for the company known as the title industry's profit leader.
Intrepid investors might see more upside in micro-cap Stewart, however. The company trades at just 52% of its tangible book value. Shares are down 60% from a February 2008 high of $36 and 43% year-to-date.

I need to read up on this group on a fundamental basis since I haven't looked at these names in ages, but I'd actually be more comfortable owning something like this than a homebuilder on the "hedge fund thesis" of imminent housing recovery based on force fed government mortgage rates. Homebuilders are still reliant on new homes of course - whereas an era of 4.5% (or lower) 30 years can be a nice impetus to get rid of a lot of foreclosed homes. So all you need with the title insurers is "transactions" rather than "new home transactions" with the actual home builders.

Looking at the charts - they have all had tremendous moves because... well it's hedge fund thesis! Of course they have been running these up. Here are 15 month charts

FNF is back to the area it peaked late in the summer on the last go around of "housing will rebound in 6 months" thesis. It has a lot of resistance in the $20-$21 area but from there a lot of room to run. But it's just jumped from $14 to $17.50 in a week so I'd like to see this pull back below $15 to enter.

FAF is at an interesting test point - it also has had a huge run but now tests its 200 day moving average (mid $28s) if it can hold this level its September 08 peak was $37 so it could have a nice run in it; I'd consider buying this (on chart only) on a close above $30. Christmas Eve was the first day it closed above its 200 day moving average and its holding above it today - so it could be itching for a run. Volume is very pathetic due to the holiday however.

STC - almost identical set up to FAF, right at 200 day moving average - $21.50ish; trading above it today on light volume. If this breaks you have upside to $33 which was the mid September period where as I said above the "housing stocks are back" thesis was last in vogue. Of course anyone who bought the thesis then was treated to 60% type of losses in all these names - which is the other side of hedge fund thesis; hedge fund abandonment. This stock was $6! a month ago.

So we'll see what HAL9000 does with these stocks - they have all had huge runs here, so I hate chasing. The latter two are at interesting points, near a major resistance area. I will spare you the PE ratio talk or any of that fundamental stuff - it's all about thesis in the casino. Bankrate.com is also at a similar place on the chart. Whenever a more meaningful turn happens in the stock market this "early cycle" stuff should be the leadership, not "late cycle". The problem is investors have been trying to run up "early cycle" stocks on "thesis" for about a year now as they constantly underestimated the viciousness of this economic downturn. Anyone believing the hype about imminent recoveries has thus far seen their portfolios sand blasted when reality returns.

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