Wednesday, 26 April 2017

OCN: A Pump And Trump Short Squeeze Play

Before we get into our latest pick, here is a quick review of our last one. On April 17th, we called a buy on North Atlantic Drilling Limited (NADL) when it was trading around $2. A recently signed $1.4 billion contract along with U.S. President Donald Trump's goal to increase offshore drilling has us thinking that the likelihood of NADL being bought out before it faces liquidity issues has increased. The market agreed and on April 20th the stock ran to over $3. Hopefully everyone who follows our blog took our advice in the last paragraph of the article:

"If you buy in and the stock runs a lot and you have profits, don't forget to take some off the table."

Because NADL has dropped back down to $2.19 on Tuesday after many traders have left the building. It's still up 10% from our call, but that has decreased from it being up over 50% just a few days prior. It still remains a compelling long for high risk investors and a buyout could come at many multiples of the current stock price. But when trading these stocks, always make sure that you take some profits off the table. We find a winning strategy is to take enough money off the table to recover your original investment and let the rest ride.

If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We have 173 followers, which has increased from 138 four weeks ago from our report on APOP. While that one hasn't worked out yet, we have had many more winners than losers and you can easily verify this by checking our post history. We believe that our good growth in followers despite the few articles we publish is indicative of people liking our picks and research.

So onto our next Pump and Trump play. Ocwen Financial Corporation (OCN) got sandblasted for a 60% loss on the same day NADL scored for us and our followers. On April 20th, OCN fell from an intraday high of $5.51 to a low of $2.12 and closed at $2.49 after it was announced that the Consumer Financial Protection Bureau (CFPB) sued OCN. It revisited $2.12 on Monday and has since bounced back to close at $2.29 on Tuesday. We think this is a strong buy at least to the $3's based on the following:

  • A technical double bounce off the $2.12 low
  • People knowledgeable of the industry calling this lawsuit unfair
  • A move by Trump and the Republicans to gut the CFPB
  • A high short interest along with high institutional and insider holdings that could cause a short squeeze

We are not going to pretend that we know the gritty details of the sub-prime mortgage industry. However, we are able to read expert opinions on the subject and it sounds like this author on Seeking Alpha is spot on with his article "Ocwen: My Take On Recent Events". We suggest that readers read this if they want some background.

Next, the announcement of a Bill to gut the CFPB is heading to the House Committee. The CFPB was created by Barrack Obama six years ago. Its dismantling would fall very much in line with the current Trump administration's goal of reducing government regulations and red tape, and in line with the general Republican goal of destroying Obama's Presidential legacy. A particularly telling excerpt from the article:

“For conducting unlawful activities, abusing his authority, denying market participants due process, Richard Cordray should be dismissed by our president,” U.S. Rep. Jeb Hensarling, (R–Texas) snarled at the director of the bureau, who was summoned to Capitol Hill earlier this month to justify his existence.

“Not only must Mr. Cordray go, but this CFPB must go as well.”

It sounds to us that OCN has a huge political ally in the Republican-held Congress simply by having a common enemy. At any time OCN could move back up on the political whims of Washington or even the speculation of the political whims of Washington that the CFPB will be dismantled. That leads us to the last point.

OCN looks like a great candidate for a short squeeze. Look at the stats from Yahoo Finance

There are 14.5 million shares short on a float of 89.3 million. What's more, the shares are mostly held by insiders and institutions. According to the NASDAQ site, institutions hold 65.4 million shares. If institutions are holding, especially in light of the favorable regulatory events that may happen soon, OCN is primed for a short squeeze.

Disclosure: We are long OCN

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