Bookkeeping: Beginning First American Corp (FAF) Position & Adding to Fidelity National (FNF)

I am going to create a 2 position basket in the title insurance sector - today First American Corp (FAF) is pulling back nicely to support, and I am going to add it to our current position in Fidelity National Financial (FNF) - these are the 2 biggest players in the field. I am having a hard time chasing the "thesis" plays that are running on "hope" so instead I am going to buy things I think will actually have much better fundamentals in the year(s) ahead. Much of what is working the past week is low grade speculative junk so for our holding periods it doesn't really work.

Again the thesis behind title insurance was laid out in this piece [Dec 26, 2008: Ways to Play the "Housing Boom" - Title Insurers]

The thesis here is we are going to start seeing a lot more transactions in real estate - not because there is any recovery but because an onslaught of foreclosures at 50%+ off prices is finally going to make a nice market. And as a title insurance firm, you don't care what the price is - you just want transactions.

Technically First American Corp has pulled back from a recent surge to $29, and is moving in concert with First National Financial which weakened off a dilutive offering. [Apr 14: Bookkeeping: Limit Order Hit for First National Financial on Share Offering] Which makes little sense but that's the type of market we are in; individual names mean little - sectors mean everything. I've started FAF as a 3.5%ish position as well as bumping up FNF on it's weakness to a 3.5%ish position - so the basket is 7.0%ish and I expect both names to move in concert but I still like having 2 names instead of 1 for some diversification purposes. FAF has been churning between mid $25s and $28 the past 3 weeks.... we're adding in the mid $26s. $25.50 is the 200 day moving average so below that level I'd expect to cut back to some degree - but will add on any serious dips.

While I don't believe in any housing recovery - I do believe foreclosure transactions will shoot up (currently 45% of all homes sold in America are foreclosures), as will transactions at the low end of the hardest hits markets as incredibly low mortgage rates combined with $8000 tax credits combined with $100-$150K homes will draw in first time buyers. Vulture investors also should swoop in to the hardest hit markets (foreclosures aplenty), and again - all we care about is "transactions" .....we don't need any sort of housing boom for this theme to work. So if this plays out as I assume - these 1st time buyers will mostly be in by end of 2009 and then we'll look around and say "now what"? By then home prices will have fallen even further, putting more and more people who need to sell to buy a new home underwater... and we're in a pickle. But that's the long term - for now, it's all about hopeful green shoots.

To repeat the 3 pronged strategy is as such

1. Ocwen - low volatility mortgage workouts that the government is going to be pressuring banks to do
   
2. Fidelity National Financial - medium volatility title insurance; all it requires is a lot of foreclosures start changing hands
   
3. (pick a homebuilder ...any name of 6-7 will do as a proxy) - high volatility; daytraders/hedgies play these like penny stocks or financials, buy dips - sell Kool Aid moments

Now the irony is today, the strongest of the 3 prongs is #3 based on an analyst note. I continue to be amazed that people put so much focus on analysts notes when they are wrong so often but this is the market.

• Shares of home builders and real-estate investment trusts jumped Wednesday following an analyst's unusually bullish note saying the real-estate sector is seeing improvement - for now. Wachovia analyst Carl Reichardt said in a note Wednesday that the short-term future for home-building stocks is looking brighter, with the group possibly poised for a short-term rally.
• "As a result of lower interest rates, aggressive pricing and the Federal Government's tax credit program for first-time homebuyers, we expect macro-news flow related to customer/builder sentiment and new home sales activity to be increasingly positive over the next four to six weeks," Reichardt said in a note
• He added that first-quarter orders could come in better than expected and field commentary indicates March sales might be up year-over-year on a per-store basis, with trends continuing into April.
• "We believe management tone on conference calls will brighten from dourly pessimistic to cautiously optimistic," Reichardt wrote.

It does show the mind set - even in the analyst community people are only talking about "4-6 week trades" ... long live buy and hold.

I want to stress these title insurance stocks are LONG term plays - I will be buying on any and all dips. While most stocks now "working" are based on hopes and dreams of recoveries, these type of stocks have fundamentals that don't require huge leaps of faith.

Long Fidelity National Financial, First American Corp in fund; long Fidelity National Financial in personal account