Long case for Realogy (H)

Realogy which was recently spun-off from Cendant is the largest listed provider real estate and relocation services in the United States and internationally. It operates in four segments: Real Estate Franchise Services, Company Owned Real Estate Brokerage Services, Relocation Services, and Title and Settlement Services.

A few days ago I acquired a long position in Realogy @ $ 20.60 and feel there is a simple and compelling long case as:

1. Realogy is the largest business of its kind and the only listed one. I believe it is about 3 times larger than its closest competitor Homeservices of America which happens to be owned by Warren Buffet who has called it "a gem".
2. Management has a large material interest in the firm. Henry Silverman who was the CEO of Cendant prior to the spin-off chose to go with Realogy. I believe this speaks volumes for who people who are "in the know" chose to align themselves with.
3. Management has stated that they might buy back shares and also that once an appropriate amount of time has passed since the spin-off they will "consider all offers" to buy the firm.
4. The current slowdown in the real estate market provides an excellent opportunity for Realogy to consolidate and build on its leading position in the market.
5. Post spin-off dynamics combined with all the negative publicity about the state of real estate industry have put pressure on Realogy's shareprice and provided a buying opportunity at depressed prices.

It seems to me that as there are no other similar listed firms the market is not entirely sure how to price Realogy. However one has to keep in mind that unlike homebuilders Realogy is a services business that carries no inventory, is not at all capital intensive and makes money on either the buy or sell side.

Keeping the above in mind, the fact that the real estate market will rebound at some stage and the possibility that Realogy could be taken over I am happy to hold on, and even add to my position in the long term.

Sara Lee spinoff of Hanesbrands

A few days ago Sara Lee finalized the spinoff of Hanesbrands to its shareholders.

A few gleanings from the updated Form 10:

1. HBI will have only around 95 million shares outstanding: - This could cause liquidity issues and exacerbate any short-term pressures on the stock It seems likely that institutions and fund managers might dump a lot of HBI shares given that HBIs debt has been rated ‘junk’ and there is no certainty yet around which index’s HBI will be included in.

2. HBI management will be exceptionally well rewarded: - The Hanesbrands Omnibus Incentive Plan of 2006 allows for a total of 13.1 million shares or about 13% of outstanding stock to be issued to directors and employees. Initial awards will be issued on the 15th trading day following the distribution date and the excersise price will be 100% of the fair market value of the stock on that date.

It seems to me that it would be to HBIs management’s advantage for its shares to trade down till their stock options are priced on the 15th trading day following the distribution date.

I intend to hold on to my SLE shares. Also given how well incentivised HBIs management is going to be to ensure that it outperforms I may well increase my position in HBI should an opportunity to buy at depressed prices present itself.