Chris Mayer, “Investing by the C.O.D.E.”

By Travis Johnson, Stock Gumshoe, April 3, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Chris Mayer is well known the mavens of Gumshoedom, not only because he has presented at the last two Value Investing Congresses but also because his publisher, Agora, has been teasing and hinting to us about Chris’ value and special situations investment ideas for years, and we’ve covered plenty of those teaser pitches. He writes Capital & Crisis and Mayer’s Special Situations. I very often end up liking the stocks he writes about, and he tends to be good at explaining and analyzing banking and financial stocks in particular (he used to be a banker, before he started his first newsletter a decade ago).

My notes on Mayer’s VIC presentation last Fall are here, and from a year ago in Spring 2013 here. In the past he’s often touted specialized companies in natural resources, like the royalty stocks (including Input Capital, which we’ve mentioned a few times and I still think, perhaps somewhat curmudgeonly, is a bit too expensive at such a premium to the capital they have invested — though, to be fair, it has climbed 30% or so while I’ve been thinking of it as overvalued, and Myron noted that he likes it this week).

So whatever will Mayer cover this time?

C.O.D.E are the things he looks for in every investment.

C is for Cheap
O is for Owner Operators — controllers should have “skin in the game,” not agent-operated.
D is for Disclosure — can it be followed and is it transparent.
E is for Excellent financial condition, no troubled balance sheets.

First idea: Mortgage servicing rights (MSR’s)

Banks are getting out of the mortgage servicing business, specialty servicers are taking up the slack. (Ocwen, Walter, etc.).

He’s recommending a pure investment in the servicing rights. Servidcer earns a fee basd on the unpaid principal balance. Base fee covers the cost of actually servicing, mailing statements, etc., but there’s also an excess servicing fee/Excess MSR that goes up as interest rates rise.

Cherry Hill Mortgage Inv Corp (CHMI), a mortgage REIT. It co-invests in MSRs with partner Freedom Mortgage Corp — they pay a management fee to Freedom. Went public in October, is at $19, they protect themselves from rising interest rates ...

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