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Doug Kass: Analyzing a Successful Trio of Trades

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Doug Kass and I are in Omaha, Neb. for the annual Berkshire Hathaway (BRK.A) shareholders' meeting. Doug has been chosen to be the "credentialed bear" at the meeting, focusing on six tough questions for Warren Buffett and his board. While he gears up for that, I decided to take a look at some of Doug's top trading ideas. In this article I dig into a group of three long ideas and why they worked.

First up is Ocwen Financial Group (OCN). The company services high-risk mortgage loans. Doug reinitiated a long position in the stock on March 6, 2012 at $15.90. The impetus for the purchase was the improving liquidity position at Ocwen. The company announced plans to sell certain mortgage servicing rights to Home Loan Servicing Solution which would transform the company from a capital-intensive businesses to a capital-light model (making it look more like a processing business going forward). The company raised $112 million on the deal (after paying down some debt) and planned to use the proceeds, along with income from operations, to pursue new business (with several portfolios on the market at the time).

Doug continued to buy the stock as it dipped around and below $15 before selling out of the name at around $25, his price target, on August 21, 2012 for a 67% profit. Yet, Doug wasn't done, he repurchased shares on Nov. 6, 2012 at around $33 given the attractive incentive plan offered to the chairman, William Erbey. The chairman would profit substantially if the share price doubled or tripled from the $24.38 exercise price on his options. Doug continued to add to the position since then and is looking for it to hit $50, maybe even $60, a share before 2013 comes to a close.

Those who continued to hold shares of Ocwen since Doug's initial purchase on March 6, 2012 been fortunate to see it breach $40 a couple times.

Next is Altisource Portfolio Solutions (ASPS). Altisource Portfolio Solutions was spun out of Ocwen in 2009, and is a provider of estate mortgage portfolio management and related technology products/services and financial services. Doug originally identified this as a good investment opportunity shortly after the spin-out in December 2009 (trading around $15) based on its exposure to the asset recovery business given the state of the economy at the time. Later in October 2011 he reiterated his thesis on the stock, stating that "the companies that stand best-positioned to find the solution to the massive overhang and shadow inventory of unsold homes will prosper mightily -- that is, those that maintain, remediate and bring to market for sale foreclosed properties. Anti-housing plays are in a growth area, with a long runway that will only get better in the years ahead."

He took profits in the stock when he sold Ocwen on August 21, 2012 for around $85-$90. He recently reentered Altisource Portfolio Solutions on March 19th, as analysts were taking down estimates post the fourth quarter earnings report to reflect more conservative margin assumptions (due to various growth investments). Doug bought on a scale, bidding under the market. He bought dips and sold rips along the way but remains invested in this name today.

If anyone played this for a maximum profit, it has traded above $120 since Doug's initial buy/suggestion.

The third and final trade to highlight in this trio is the trade in Altisource Asset Management (AAMC). Yet another play on the family that originated with Ocwen. Altisource Asset Management provides portfolio management and corporate governance services to investment vehicles that own real estate related assets. This is Doug's stock of the year for 2013. As Doug explained, this group of companies has been so successful because, "In a sense, the management of Ocwen Financial has created an ecosystem similar to Apple (AAPL) in which there are these symbiotic relationships between the components (ASPS, RESI and AAMC)."

He had trouble getting in on the when-issued trading of the stock (as it spun out of Altisource Portfolio Solutions) at $16 a share, but was able to buy an odd lot on December 14, 2012 at $42 a share. He quickly bought another tranche under $59 on December 28, 2012. The shares had serious momentum early on and hit $100 on January 11, 2013, about a month after the initial offering. Prudently, Doug sold some shares for $127 on January 15th, and took more profits selling a majority of the remaining shares on March 21 after it neared $150. (He still holds a small position in the name.)

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