Opportunity amid mortgage chaos

  • Article by: PATRICK KENNEDY , Star Tribune
  • Updated: June 20, 2009 - 7:59 PM

Seeking a counter-cyclical play, Tealwood found a good bet in Dolan Media and its foreclosure services unit.

At the depths of the market last fall when stocks were falling, government bailout programs were being formulated and forecasters were predicting recession and depression in equal measure, the portfolio managers at Tealwood Asset Management in Minneapolis were searching for stocks that would be counter cyclical to the market. They didn't have to look far. Intrigued by the foreclosure business of Dolan Media they headed across town to meet the management and, eventually, Tealwood bought in.

Dolan Media has two principal businesses: the company's professional services business includes Counsel Press, an appellate service provider, and American Processing Co., which provides mortgage default processing services. In 2009, the professional services business provided $99.5 million of the company's total revenue of $189.9 million. Dolan's business information division is the second-largest publisher of business journals and second-largest publisher of court and commercial publications. That division had revenue of $90.5 million.

Mortgage default processing requires multiple steps. Some require a lawyer, but most steps don't. Dolan's proprietary case management software system assists in the efficient and timely processing of large numbers of foreclosure, bankruptcy, eviction and, to a lesser extent, litigation case files.

Portfolio managers at Tealwood were asking: "What's out there that is looking good in a recessionary market?" said David Neal, a portfolio manager at Tealwood. The mortgage default processing business of Dolan and, to a lesser extent, the public notice business in its business journal and legal publications, were the counter cyclical answers they were looking for.

Tealwood follows a value investing model and Neal estimates the average price of Dolan stock it acquired is about $4.40 per share. The stock ran over $14 per share in early May before settling around $11 on Friday.

Bob Evans, managing partner and senior research analyst at Craig-Hallum Capital Group, has been bullish on Dolan Media since it went public in August 2007. He believes Dolan's default processing business will continue to grow. Evans believes foreclosures will rise in 2010 and 2011 and that Dolan can continue to grow its national market share and expand beyond the six states where it provides mortgage default processing now. "There is a misperception that there is going to be a big spike in the foreclosure business," said Evans.

If Dolan Media is such a great counter-cyclical play, why did it get hammered last fall? It dipped below $3 per share in November. Evans says there was a great deal of uncertainty last fall on how banks and the new Obama administration would deal with rising foreclosures. In recognition of exactly how uncertain that time was, Dolan Media temporarily suspended its guidance on financial results. "The fear of the unknown was much greater than the reality," Evans said.

"Overall, the stock has rebounded nicely. We've got more clarity on the foreclosure market in this country," said Haug Scharnowski, director of investor relations for Dolan Media. Scharnowski says the company will continue to grow the mortgage default processing business. "We want to ultimately be in all 50 states, expanding into new territories and expanding our market share in markets we currently operate in."

But they are not ignoring their publishing business. "We are in 21 markets today and we've identified 65 markets we'd like to be in," Scharnowski said. "It's not a space we are shying away from."

Evans expects second-quarter revenue for all of Dolan Media to be $61 million, up 47 percent from the same quarter last year, and operating cash flow to be $17.8 million, up 48 percent.

State companies join Russell indexes

A dozen Minnesota small-cap companies are slated to join Russell Investments' signature stock market indices this week.

They are: ATS Medical, Cardiovascular Systems, Caribou Coffee Co., Communications Systems, Enteromedics Inc., Gander Mountain Co., Hawkins Inc., Hickory Tech Corp., Lakes Entertainment, Moneygram International, Rochester Medical and Vascular Solutions. All of them will be added to the Russell 3000 broad market index and the Russell 2000 small-cap index.

Only one Minnesota-company is coming off the list -- Hutchinson Technology. Russell determines membership in the indices primarily by objective, market-capitalization rankings and style attributes.

The Russell 3000 is an index of the 3,000 largest stocks in the United States and represents about 98 percent of the market. The Russell 2000 tracks the small-cap market and is a subset of the Russell 3000. The Russell 2000 represents approximately 10 percent of total market capitalization. Inclusion in the Russell indices raises the profile of small companies and can increase their liquidity. Russell indexes are used by investment managers and institutional investors as benchmarks for both passive and active investment strategies. Inclusion permits some funds and investment managers to add those stocks to their portfolios.

Patrick Kennedy • 612-673-7926

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