Altisource Stock: Hits Multi-Year Low; Finally Interesting (ASPS)

Altisource Portfolio Solutions (NASDAQ:ASPS) is a financial services company focused on providing a range of services for the real estate market. The company has a long and winding history which I will not focus on in this article.

However, in its present form, investors tend to buy shares in Altisource as a way to get exposure to foreclosures. Namely, if and when foreclosure activity increases in the United States, Altisource should see a substantial increase in its fees and service income related to those product lines. Thus, in a way, Altisource serves as a way to profit when the American housing market slumps.

With interest rates having gone sharply higher and housing prices starting to roll over, Altisource attracted a substantial number of value investors in late 2022. However, as the chart shows, that surge in ASPS stock has quickly given way to a major bust:

Just since October, the stock nearly doubled in the span of a month, and then subsequently dropped by two-thirds from that November peak. This is pretty wild stuff. Adding to the volatility, ASPS stock slumped another 20% on Thursday (as of this writing) on news that it is exploring options to deal with its upcoming debt maturities:

The stock briefly fell below $6 back in 2021; otherwise, this is Altisource Portfolio Solutions’ lowest share price since going public. So, with the stock down sharply both on a short- and long-term basis, is this unique housing services company finally a buy?

What Altisource Does

Altisource aims to offer four primary services for the housing market:

It aims to serve as a marketplace for buying and selling homes while also providing tools to lending companies and mortgage servicers. Of these businesses, however, the service side gets by far the most attention.

As you can see, within Altisource, there are product lines for pre-foreclosure title, property inspections, foreclosure trustees, title and escrow, and valuation and property protection services for managing foreclosed properties. In other words, if and when banks need to start foreclosing on more houses, Altisource stands at the ready to assist these banks with handling the paperwork and due diligence for managing these houses and getting them resold to new investors.

I don’t think I need to go on at too much length on why foreclosures may spike in coming months and years. The abrupt rise in interest rates has greatly pressured housing affordability. Throw in a weakening economy and potential recession, and there’s a decent chance that people’s ability to pay their mortgages may be impacted.

Also, it seems the abrupt rise in U.S. housing prices has ended. The median existing single-family home has dropped from a peak of $420,000 to $376,700 as of the latest data point. There is some cyclicality to this data set, and prices are still up on a year-over-year basis; however, the present direction of the trend seems to be downward:

For people that used their homes as a way to pay for things via frequent cash-out refinancing, the combination of higher interest rates and sagging equity values could put a strain on their household finances. Also, Altisource bulls argue, a substantial number of people got into the housing market for non-traditional reasons such as to buy properties to rent on Airbnb (ABNB). These sorts of mortgages could quickly run into foreclosure when the economic cycle turns downward.

The point of this article isn’t to quantify how quickly and how far the housing market might tumble. Just realize that the bull thesis around Altisource is reliant on foreclosures increasing. And now, while foreclosures seem likely to rise, Altisource shares have plummeted to near their all-time lows. So what’s going on?

A Liquidity Squeeze

The fundamental issue for Altisource is its profitability, or lack thereof. The company has had hit-or-miss profitability for many years now, including some large losses during the height of the pandemic. In addition, the company’s revenues have collapsed as it has shrunk its legacy operations and divested other lines of business:

From more than $1 billion in annual revenues in the mid-2010s, revenues have fallen to just $157 million now. Earnings are also pressured. The company lost 70 cents per share in each of its past two quarters, which would amount to nearly $3/share of losses on an annualized basis.

For a stock now trading at $6, that’s an uncomfortable level of loss-making.

In theory, the company’s efforts to expand operations such as its housing marketplace should pay off over the longer-term. However, it is losing enough money now that it really needs a boost from rising foreclosure-related revenues as a bridge to get to that future.

Speaking of these liquidity concerns, on Wednesday, reports surfaced that Altisource has hired bankers to address the company’s 2024 debt wall. As the company has a loan and a revolver due next year, it needs to raise capital, extend maturities, or otherwise come up with funds to address these looming liabilities.

In the past, Altisource has managed to sell off business lines for substantial sums of money. However, particularly with a down housing market, it’s unclear how much market interest there might be for Altisource’s operations aside from its foreclosure-related products. Of note, insiders hold a large portion of Altisource’s stock and should be aligned with common shareholders. That said, this alignment of interest isn’t necessarily enough to make the investment a winner if the company can’t find a ready source of cash over the next year.

ASPS Stock Bottom Line

Altisource may not be an especially well-known company among the general public. However, it has surprising resonance with a certain subset of investors, namely folks who are interested in deep value and have a negative view of the overall economy and housing market.

As one prominent investor recently put it on Twitter:

“$ASPS is like a call option on vindication for every value [investor] who thinks the whole system is a scam and wants to profit from watching it burn. [Altisource] speaks to the soul of the contrarian value curmudgeon in a way no other stock ever could.”

Right now, these contrarian value curmudgeons are in a bit of slump. Many of the popular themes in this community, such as energy stocks, have sold off a bit from their 2022 highs. Meanwhile, the sorts of companies that these investors tend to bet against, like Tesla (TSLA), are now rebounding from their worst levels. Not surprisingly, with market conditions turning less favorable for curmudgeonly value investors, some non-core positions, like Altisource, are getting dumped at whatever price as folks look to reduce their total gross exposures.

There should, however, be a rebound in ASPS stock once the foreclosure thesis gets passed around again. The American housing market likely topped out in 2022 and appears set to decline or at minimum be flat for a reasonable period. There will be a decent window of opportunity for Altisource to potentially show positive scale and operating margin benefits as foreclosure activity starts to tick higher.

I personally haven’t bought Altisource, even after its latest 20% one-day decline, because I’m simply not sold on the idea of housing being a “Big Short” style opportunity in 2023. I think the housing market will simply decline a bit and then stabilize, rather than collapsing.

But, for folks that want to take a more concrete position on a potential extended downturn in the housing market, ASPS stock could be a good way to do that. And, if nothing else, the company has proven to have a loyal group of shareholders over the years, and it is likely to rally once again as soon as any additional negative headlines come out of the housing market.

It is worth acknowledging the potential liquidity risk in Altisource’s balance sheet if business activity doesn’t turn up quickly enough. The debt isn’t due until 2024 which gives Altisource some flexibility. However, it really needs some signs of growing momentum in foreclosure-related services to reset the narrative here. That said, this is a small market cap situation with a lot of investors that have it on their watchlists. Shares could be primed for a big rebound on any positive financing news or an upturn in business results.