An Insider’s Company Bought Altisource Shares
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Brown’s Valley Development Company, which is owned by Altisource Portfolio Solutions (NASDAQ: ASPS) Board member Michael Linn, has purchased 1,000 shares of the company’s stock according to a filing with the SEC. The buy took place on November 27, at an average price of $103.87 per share, and augments close to 16,000 shares that are owned by Linn, his children, and his trust. Altisource Portfolio Solutions is a mortgage portfolio management services company. The stock is up about 120% in the last year, and is up nearly 300% from two years ago, as investors see a recovery in the mortgage market and therefore good business for Altisource. Given that, it’s interesting to see further insider buys at the company. Normally insiders are incentivized to diversify their wealth away from the company, which is one reason why their purchases tend to outperform the market (here's what studies say about insider trading), and we’d particularly expect people who have been long Altisource to lock in some of those profits rather than invest further. Instead, our database of insider filings shows that Linn has been adding shares over the last year, most recently in August (see a history of insider buys at Altisource).
Altisource Portfolio Solutions’ business has been doing well so far this year. In the first nine months of 2012, revenue grew 46% compared to the same period in 2011 and earnings were up 77% as SGA expenses rose only slightly. Growth rates were a bit slower in the third quarter, but net income was still up 57% from the third quarter of last year. The market seems only moderately bullish on the stock, as the trailing P/E multiple is 25; that’s fairly high compared to most stocks, but would indicate a much lower growth rate going forward. Wall Street analysts, meanwhile, are optimistic with the stock trading at 15 times consensus earnings for 2013 and a five-year PEG ratio of 0.4. Billionaire Leon Cooperman’s Omega Advisors cut its stake in Altisource by 20% during the third quarter, but still owned 1.3 million shares and it’s possible that the fund was locking in some of the profits on its investment. Omega had been a major investor for several quarters, and has generally been reducing the size of its position in small increments since early 2011. Check out billionaire Cooperman's latest stock picks.
We would consider Fiserv (NASDAQ: FISV), Lender Processing Services (NYSE: LPS), Walter Investment Management (NYSE: WAC), and Home Loan Servicing Solutions (NASDAQ: HLSS) to be a good peer group. These companies have a very wide range of trailing earnings multiples, but analyst expectations place them all in the 8x-13x range in terms of forward P/Es. So Altisource, on that basis, is more expensive than any of its peers and in some cases very much so. However, it appears that none of these other companies can match Altisource’s recent growth rate. Revenue, in many cases, shows little change in the company’s most recent quarter compared to the same period in the previous year. Earnings growth is better in some cases, with Lender Processing Services’ growth rate close to 45%, but that company is actually expected to see a higher growth rate going forward than Altisource judging by its higher trailing earnings multiple.
Continued insider purchases at the company, even after its rise, would seem to indicate strong confidence, and there’s a case to be made that based on analyst expectations Altisource remains undervalued. However, we’re puzzled as to how the company would be able to achieve and sustain a much faster earnings growth rate than its peers- which is necessary to justify its higher forward earnings multiple- and investors should confirm that this is likely before considering buying the stock.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!