Pro Picks: 3 Distressed Investing Stocks
Investment ideas from Daniel Lewis of Orange Capital
Pro Picks: 3 Distressed Investing Opportunities
Watch the full episode: Distress, disruption, and unloved assets: Is now the time to dig where others aren’t looking? In this episode of In the Money with Amber Kanwar, seasoned investor Daniel Lewis, Managing Partner of Orange Capital, shares his contrarian playbook about hunting for opportunity in orphaned stocks and distressed markets.
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1. Claros Mortgage Trust (CMTG)
What It Is and Why It’s Underperforming
Claros Mortgage Trust (CMTG) is a mortgage REIT primarily focused on multifamily apartments, with some exposure to office and hospitality properties. Since its 2021 IPO, the stock has plummeted from its debut price to around $2.50, trading at 20% of its book value (~$13/share). The underperformance stems from a high proportion of risky loans—40% of its portfolio is categorized as risk level 4 (in workout) or 5 (in default)—leading to over $200 million in reserves and the suspension of its dividend. This has alienated retail investors, leaving the stock orphaned with no natural buyer base.
Why It’s Been Struggling: Concerns over asset quality, with 40% of loans in distress, have spooked investors. The lack of a dividend and balance sheet volatility have further depressed the stock, as REITs typically attract income-focused retail investors.
The Opportunity: With $6 billion in assets and $200 million in liquidity, CMTG is well-positioned to weather the commercial real estate downturn. The company has already taken significant reserves, and even if reserves triple to $600 million, the book value remains around $10/share—four times the current price. Large distressed funds (e.g., KKR, Blackstone) provide a natural exit for bad loans, reducing risk without requiring rate cuts.
Upside Potential: As bad loans are resolved, the stock could trade at 70-80% of book value, implying a target price of $7-8/share. This represents a potential 180-220% return from the current $2.50, offering a compelling risk-reward profile for a stabilizing mortgage REIT.
2. Hippo Holdings (HIPO)
What It Is and Why It’s Underperforming
Hippo Holdings (HIPO) is a small-cap ($600 million market cap) insurtech company that went public in 2020. While perceived as a home insurance provider, its core value lies in its subsidiary, Spire, a leading fronting insurance company that earns riskless fees by facilitating specialty underwriting. The stock has underperformed due to a brutal cycle in the property and casualty insurance market, driven by inflation, catastrophic events like wildfires, and overcapitalization in insurtech during the housing boom. Hippo’s home insurance business has also faced losses, keeping it in the “penalty box” with investors.
Why It’s Been Struggling: The insurtech sector was hit hard by inflation and inadequate rate filings, leading to significant losses. Hippo’s home insurance underwriting losses and a sluggish housing market have overshadowed its stable, fee-based fronting business, causing the stock to trade at a low multiple.
The Opportunity: Spire generates a 5% management fee on specialty underwriting (e.g., wildfire, school bus insurance), producing a projected $35-40 million in operating income this year, with growth to $70-75 million in the next few years. Hippo’s NOLs eliminate taxes, and its excess cash and home agency business add further value. An upcoming analyst day could reframe Hippo as a stable, fee-driven fronting company, warranting a higher multiple.
Upside Potential: As investors recognize Spire’s fee-based model, Hippo could command a high-teens multiple, compared to the single-digit multiples of volatile home insurers. With projected income growth, the stock could double or triple from its current $600 million market cap, offering 100-200% upside as the narrative shifts.
3. Better Home & Finance (BETR)
What It Is and Why It’s Underperforming
Better Home & Finance (BETR) is a mortgage origination company that leverages AI to streamline the lending process, offering 24/7 loan officers and rapid rate locks. Since its 2021 peak, when it originated $50 billion in mortgages, the stock has collapsed to $0.20 (2% of its $10 SPAC issuance price) after a 500-for-1 split. The drastic decline reflects a 95% drop in origination volume to $3.5-4 billion last year, driven by rising rates and a competitive direct-to-consumer model. A high-profile mass layoff and SoftBank debt further damaged sentiment, raising concerns about cash burn and solvency.
Why It’s Been Struggling: The shift in the rate environment crushed mortgage origination volumes, forcing Better to cut costs aggressively. Its SPAC listing was a disaster, and the stock’s low price and liquidity concerns have made it an orphan equity, despite SoftBank’s 12% ownership.
The Opportunity: Better’s AI-driven platform (e.g., Tin Man middleware, Betsy agent) enables efficient underwriting, positioning it as a true AI-native operating company. Partnerships with Neo Mortgage for white-labeling and new distribution channels, plus a home equity line product, diversify revenue. A recent SoftBank debt restructuring (50% haircut) and reduced cash burn (<$20 million/quarter by year-end) extend its runway, with breakeven projected by early 2026.
Upside Potential: If Better reaches $6-10 billion in originations, it could achieve profitability and generate $200 million in earnings over time. As a takeout target or growth story, its $150 million market cap could scale to $2 billion (private market valuation), implying a 10-13x return. However, it carries a risk of running out of cash, requiring careful position sizing.
