My account value fell about $2,200 ($400 in commissions and about $1800 in realized and unrealized gains and losses) from the initial $60,000. What knowledge did I gain from this "tuition"? Let's dig into the data.
I traded in a number of names, but one in particular accounted for about 86% of my total losses. I will just revfiew what happened on this name in this post and save the other names for later.
DJSP cost me $1,549.27 (before commissions). My first trade was to buy 385 shares at $2.2626 on 10/13/10. Although the stock kept falling (a total drop of 56% over 8 trading days) I kept trying to "catch a bottom" with repeated entries followed by getting stopped out. In total I bought and sold 14,669 shares. Avg. price to buy was $1.83. Avg price to sell was $1.73, so a loss of only about 10 cents per share. Meanwhile the stock price fell from 2.26 to 1.04 or 1.22 per share. So my loss control worked well. On 17 opening buys, my average loss per trade was only about $90, much less than the $600 maximum loss per trade I was using in this period.
I got into the stock because I think foreclosure activity is going to continue to grow as house prices are not going to rise far enough and soon enough to bail out the millions of homowners who are underwater on their mortgages. There is no apparent way out of this mess that does not involve services that DJSP provides or could provide. (Two other names I also bought during this period that did not fall as badly are LPS and ASPS.)
The company, DJSP, does foreclosure processing in Florida, a state that accounts for a disproportionately huge share of foreclosures. This firm does about 20% of the Florida foreclosures. It is mainly owned by a lawyer, David J. Stern, but since it is not legal for a law firm to be public, this entity is only the non-legal part of the business. The background in brief (in my personal opinion or characterization) was that two entities of dubious competence got together and tried to outsmart each other with complex financial engineering. So far it appears they both lost. Or maybe Stern won since he took cash out of the deal. The resulting microcap company is a nighmare of complexity that is inappropriate for such a small company. There are 10 million shares outstanding excluding some 17 million more that could become" in the money" via warrants and preferreds if the stocks get into the $20s. One of these two "outsmarting" entities was a SPAC (special purpose acquistion company.)
Following definition of a SPAC (a blank-check company) for those not familiar:
What Does Special Purpose Acquisition Company - SPAC Mean?A publicly-traded buyout company that raises money in order to pursue the acquisition of an existing company. SPACs raise blind pool money (most of which goes into a trust) from the public for an unspecified merger, sometimes in a targeted industry. Each SPAC is typically sold at $6 per unit for one share of common stock (to be publicly-traded in the future) and two warrants that can purchase additional shares. If an acquisition is not made in two years, the money is returned to the original investors.
This particular SPAC started trying to buy a company in China. When they failed to find ont and time was runnig out on the two year clock they somehow stumbled upon Stern.
The other entity was a lawyer of apparently questionable ethics. At least there has been a lot of negative publicity about him. Hard to know the truth in this case. (No need for jokes about lawyer ethics in general here.). I should have listened more to my distaste for the guy from what I read while doing my due diligence.
The DJSP common stock was around $10 at the start of this year and last week briefly fell below $1.00. EPS was at a run rate of $1.20 ($0.30 per quarter x 4 = $1.20). So it looks really really cheap for reasons that appeared to be temporary. There were a couple of earnings disappointments and downward adjustments to earnings, and the attorney general of the state, perhaps in an effort to generate publicity for his run for the governership of the state, launched an investigation.
The key news recently that really got me turned off was that last week the entire senior management, excluding Stern, quit on the same day. No public information as to whether they were really fired or really quit of their own accord. Nothing from the company to explain what is going on. My take is something really negative has beeen uncovered in the ongoing investigations and the news will force the company to go out of business. The CFO, the COO, the general counsel. The IR person never calls back. The lead outside director has taken over the chairmanship. These senior managers had all been recently hired (this year) as Stern apparently tried to make the company at least look better managed. If that does not happen, then the next most likely explanation would be that there were a few loyalists (Stern and a few key people with him from the start) who were really running the company and the efforts to bring in professional management when they became a public company were merely cosmetic.
My Florida-based source on this one was too forgiving of the warts. It looked like it was selling for $2 or $ 3 per share on an eps outlook of over $1.00.
The lesson for me here ("listen to your gut instinct assessments of people") was not a new one for me. Just a refresher course I apparently needed.
I still think that the concept of more foreclosure activity is valid, and that the current focus in headlines of problems with "robo-signing" is a relatively minor and solvable problem. The real problem is underwater mortgages, not the short cuts taken by mortgage servicers and lenders.
Chart below is DJSP. Note that the ADX indicator was always over 20, which means that this stock was TRENDING, and the direction was DOWN. Not one to buy. MACD indicator never gave a Buy signal in that the two lines were always below the zero line.
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