First American Financial Corp (FAF), Fidelity National Financial Inc (FNF): The Bottom Line

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First American Financial Corp (NYSE:FAF)The annual Value Investing Congress is never short of interesting ideas. This year, Zeke Ashton from Centaur Capital Partners proposed his own play on an improving housing market.

Why housing?

American housing is hotter than ever. Prices have risen at the fastest pace since 2006, while record low interest rates compel investors to acquire cash flow positive properties. Meanwhile, homeowners are refinancing their homes while others take advantage of newly-acquired home equity by trading up or moving cross country.

All this activity is starting to drive real estate-related equities.

In short, the housing market is once again…well, active.

How to play activity in real estate

Other plays on American housing may not offer a compelling valuation. The whole housing sector as measured by the SPDR S&P Homebuilders (NYSEARCA:XHB) is up 21% year-to-date and 50% over the last year. This kind of surge doesn’t lend itself to bargains.

XHB data by YCharts

So where does Mr. Ashton say investors should look to play growth in housing? He says the bargains are in title insurance companies.

Title insurance companies protect the homeowner and seller from any issues in the legal claim to property. The business is very profitable, in part because insurance is virtually unavoidable during a real estate transaction and in part because claims are very rare.

Additionally, the industry offers unique economics:

  • There are really only four players in title insurance, which allows for “rational” pricing designed to create profits, not compress margins.
  • Title insurance profits grow with an increase in activity (sales and transfers of real estate plus refinances) and the price of real estate (higher prices mean higher premiums).
  • Customers are worth thousands of dollars each, ranging from $1,000 in revenue on refinances to $7,800 for commercial real estate transactions.

Insurance stocks worth a look

One of the largest players in the space is First American Financial Corp (NYSE:FAF), which became a pure-play on title insurance and related services after spinning off real estate data services company CoreLogic in 2008.

This spin off has made First American Financial Corp (NYSE:FAF) a true pure-play on real estate transactions. The company reported an excellent quarter in the first quarter of 2013, earning 33 cents per fully diluted share as total revenues were up 19% and agent premiums rose 29%. Growth is largely attributed to a boom in refinances, as American homeowners use HARP to refinance at a lower interest rate.

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