Send me real-time posts from this site at my email
Motley Fool

This Countercyclical Stock Could Be a Good Hedge

Altisource Portfolio Solutions (NASDAQ: ASPS) is a mortgage servicing company focused on the market for foreclosed residential real estate loans. Altisource thrives when the overall economy is not looking so hot, because it derives revenue from troubled home mortgages. But does the company's countercyclical nature make Altisource a good addition to an investor's portfolio?

Altisource's business

Altisource is a non-bank financial company that services residential mortgages. The company assists investors and debt holders by administering basic upkeep services on properties, collecting payments from borrowers, managing the documents related to a mortgage, selling the properties, and more.

When a borrower has trouble paying the mortgage, the debt investors who own the mortgage claims will hire a company like Altisource to assist in the process of collecting payments and managing any necessary loan modifications or restructuring. Altisource will usually become involved when a borrower begins having issues paying the bills, and it will stick around until the mortgage is in good standing.

Image source: Getty Images.

If a mortgage goes into foreclosure, the homeowner will generally move out of the home, and there is a legal process for transitioning the home to a new owner. During the legal process, Altisource will ensure necessary services are performed to see through the transition. For example, Altisource will arrange for a house to be appraised and for the property to be preserved, and manage the sale process through its auction website, Hubzu.com.

Altisource specializes in the foreclosure process and ensures a smooth transition for the bank or property owner.

Countercyclical financial results

Altisource can be described as a countercyclical business, which means that the company does well when most businesses are suffering. This is because the number of distressed and foreclosed properties that need to be serviced soar when the general economy is not doing well. Coming out of the 2008 recession, Altisource saw its financial results surge.

Altisource Metrics 2008 2009 2010 2011 2012
Revenue $160.4 million $202.8 million $301.4 million $423.7 million $568.4 million
YOY growth % 18.9% 26.5% 48.5% 40.6% 34.1%
Net income $9.2 million $26.0 million $49.3 million $71.1 million $110.6 million
Net income margin % 5.7% 12.8% 16.3% 16.8% 19.5%

Data Source: Altisource financial report.

However, the company's results have not fared well over the last few years as the general economy has strengthened. Revenue and earnings have persistently declined as the volume of newly distressed mortgages has slowed to a trickle.

Altisource Metrics 2015 2016 2017 2018 Last Twelve Months
Revenue $1,051.5 million $997.3 million $942.2 million $838.2 million $725.6 million
YOY growth % (2.5%) (5.2%) (5.5%) (11%) (13.3%)
Net income $41.6 million $28.7 million $308.9 million ($5.4 million) ($13.3 million)
Net income margin % 3.9% 2.8% 32.8% (0.6%) (1.8%)

Data Source: Altisource financial report.

Altisource is now bleeding cash and has been streamlining its operations to preserve its capital while it waits for the industry environment to improve. In 2019, the company sold its financial services business, wound down its inventory of distressed homes for sale, and divested its publicly traded stock portfolio. This was on top of cost cuts and layoffs in its core business.

A portfolio hedge

Investors may want to include a stock like Altisource in their portfolios as a sort of hedge on the broader economy. After all, it would be nice to have some stocks that perform well if the United States heads into a recession.

That being said, Altisource isn't a low-risk stock. The company is currently operating at a loss and has a good amount of debt on its balance sheet. If the economy stays strong for several more years, Altisource may continue to suffer, and its stock price would likely reflect that reality.

10 stocks we like better than Altisource Portfolio Solutions
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Altisource Portfolio Solutions wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of December 1, 2019

Luis Sanchez has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue