PORTFOLIO UPDATE: AN ISSUE OF SELF-DYNAMICS
IMH was liquidated from the portfolios this week in the 20-21 range for what was a roughly 14 point profit since inception in Q4 2014. This leaves us with the most significant cash position we have had in years, which opens the doors to pursuing new opportunities as 2015 progresses. While discovery, research and initiation of long positions should normally be systematic, repeatable process. The decision to sell is much more dynamic in nature. It is rare that I will sell a position because of concerns regarding changing fundamentals. It is true that by the time concern rolls across my consciousness, it will also be persuading others who hold the position to reduce exposure. Fundamental data then is a lagging indicator, not being necessarily useful to sell decisions. Or at least sell decisions at an advantageous price. Impac certainly hasn't experienced any fundamental changes worthy of notice. If anything, the stock remains dramatically undervalued. Not to mention it being a great way of participating in nonqm loans, which is the future of alternative mortgage financing. What the decision to sell IMH comes down to is an issue of comfort and the fact that once comfort in a position becomes compromised even slightly, an investor becomes vulnerable to decisions that carry a negative expected value. I can't be uncomfortable in a company like Impac and efficiently sit through the volatility. Inevitably, I will become vulnerable to that volatility, being forced into a poor decision with a large position that will be difficult to liquidate. Rather than having the market force my hand at an inopportune time, I would much rather be proactive in recognizing points in the life cycle of price when I don't properly grasp risk vs reward. Or you could also say, points in time when an investor embraces their confusion through defensive measures. And that"s all I've done here. It's an issue of self dynamics as opposed to market dynamics. At a certain point, knowledge of self while investing becomes equally if not more important than any knowledge of the markets that can be...
SO IMPAC DECIDES TO RAISE SOME CASH…..
T11 Capital is currently long shares of IMH. Original research report outlining the opportunity can be found here. Unfortunately, a majority of investors don't listen to conference calls that pre-announce a capital raise as being forthcoming. Additionally, a lot of funny money has become involved in Impac on both the long and short side, causing the tremendous spike in volume and volatility over the past couple of weeks. When a cash raise comes together with the sudden onset of volatility brought about by a gaggle of new speculators, you are bound to have the challenges of misinformation. Here is some clarity: 1. In the Q1 conference call that took place in late-April management said, "we are currently in discussions with various parties to provide between $25 million and $50 million of debt and/or equity capital." 2. They announced on Friday that they are raising $25 million in a convertible note offering at 7.5% convertible in January 2016 at a conversion price of $21.50 per share. Mandatory conversion takes place if after January 2016 the stock trades above $30.10 for 20 consecutive trading days. 3. Why do they need this money? The company is facing skyrocketing origination volume. As a result they face increased "warehouse haircuts." A warehouse haircut is essentially the portion of the credit line advance that the originating lender is responsible for. It typically falls in the 1-2% range. Warehouse haircuts increased from $20 million in Q4 to $30 million in Q1 as origination volume increased dramatically. This is the cost of doing business as a lender. As cash flows continue to increase warehouse haircuts will take care of themselves. However, given that the company is facing growing pains of a sort at the initial onset of their new business model a cash infusion is necessary. Additionally, the cash will be used to "retain mortgage servicing rights and working capital to fund the growth of origination volumes and contingent consideration payments associated with the acquisition of CCM." With the growth of CashCall into a total of some 40 states from 11 in Q1, advertising expenses will rise dramatically. Initially, the capital outlay to secure advertising in all of those new states will be substantial until those states begin producing mortgage origination revenue to offset the advertising costs. As the additional states begin producing revenue, the overall efficiency of their advertising model increases because of the volume discount they receive by increasing advertising basically nationwide. Dilution is only a bad thing if management can't achieve returns on capital they receive via dilution. Impac is in a stage of its business growth where high returns on capital are not...