Adding this new spin-off to my CAPS portfolio on recent weakness
I am taking advantage of the recent weakness in First American's (FAF) recent spin-off CoreLogic (CLGX) to add a position in the company to my CAPS portfolio.
Corelogic is involved in many aspects of the real estate market, on the data side of things. The company does appraisals, does background checks, makes property tax payments on behalf of mortgage companies, tells lenders if properties are located in flood zones, etc...
At first glance one would think that all of these things appear to be highly cyclical in that they are tied to housing and they would be right...however CoreLogic offers a number of services that are essentially countercyclical.
The countercyclical aspects of CoreLogic's business that theoretically would thrive during periods of housing weakness include:
- Loss Mitigation
The Company even has a "Resident Screening" business that helps owners determine whether an individual is a good candidate to rent their property. One would think that the number of renters will increase as the level of homeownership decreases.
Unfortunately, the countercyclical portion of CoreLogic's business is currently smaller than its housing-related business. So any continued weakness in the housing sector, which I fully expect, could have a negative impact on CLGX's stock price and in turn earnings in the near future.
Theoretically, one could hedge this risk by shorting a homebuilder or some other housing-related stock as I am currently doing in CAPS. Be careful to limit the size of your hedge though because I suspect that the upside for builders is much higher than it is for CoreLogic should we experience any unexpected economic strength.
CLGX really isn't cheap enough for me to buy a stake in it in real life yet, though I would be very interested if it dropped a couple bucks from its current change level. I am adding CLGX to my CAPS portfolio today at $18.29 so that I can keep an eye on it with the intention of picking up some shares for real on any significant weakness.