This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Hedge Against Market Risk With Default Servicers

By Glen Bradford

What is portfolio insurance? A method of hedging a portfolio of stocks against the market risk by short-selling stock index futures.

Let's settle for just hedging against market risk. Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market-risk factors.

So let's assume that the stock market goes down 50%. Granted, this is unlikely to happen with the seemingly inevitable monetization of the deficit. But if the market tanks, housing will fall.

What's going to happen to the foreclosure market? Do you think more people would be able to afford their homes? Do you think that interest rates could get lower to finance homes at lower monthly payments? Do you think that the economy would improve? Probably not. All signs point to more foreclosures, short sales, etc.

The only way that I see out of this trap is to print enough money to justify these higher prices. We're on that road, but it's going to take a while.

While we wait, I advise taking a look at default, foreclosure, short-sale servicing companies to hedge against the market risk. Fannie Mae (FNM), Freddie Mac (FRE), and Bank of America (BAC) are going to need these services badly. As for now, it is my understanding that there are temporary industry-wide problems. Rumors indicate a mortgage moratorium that is supposed to end by the end of the third quarter.

The Dolan Company (DM) is trading with a forward P/E of around 9.10, suggesting earnings are going to increase over 50% year over year. They acquired DiscoverReady in November of last year and, in my opinion, historical operating income instead of historical net income should be used to forecast the future, in this case.

Altrisource Portfolio Solutions (ASPS) is trading with a P/E above 20, is getting upgraded by analysts, and recently acquired The Mortgage Partnership of America. That said, note the rough $3.2M in EBITA that was acquired through the MPA and the more than doubling in properties under management from January through March of 2010.

Lender Processing Services (LPS) just pulled off a glowing quarter amidst a period impacted by sluggish industry trends. Trading at an estimated P/E of 9.10 for 2010 makes this one inexpensive as well.

Stock quotes in this article: FNM, FRE, BAC, DM, ASPS, LPS, DJSP 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,424.85 +162.29 1.00%
S&P 500 1,862.31 +19.33 1.05%
NASDAQ 4,086.2250 +52.0640 1.29%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs