In my previous article, I approached Pagaya (NASDAQ:PGY) from the standpoint of a new company dealing with numerous short-term negatives, during possibly the most volatile chapter in its exceedingly volatile history.
I am happy to say that its recent earnings report has allayed many fears and attracted a large number of new institutional investors.
Institutional Purchases
I follow a particular site, Fintel, that tracks institutional investments (13 F filings) in individual companies, and I watch it closely, sometimes daily.
One of Pagaya's primary goals, stated in January, 2024 was to increase its institutional holders by (1) executing a stock split to raise the share price above the $18 mark (2) filing reports on domestic SEC forms, and (3) relocating world headquarters from Tel Aviv to NY city, the financial center of the US.
In the 4 weeks after a disastrous equity raise on March 12/13th, the shares fell significantly, and there were large sells of institutional positions. The total number of institutions which owned Pagaya decreased from over a 100 to approximately 48. Not even the insider-buying by officers on April 4-5th stemmed the selling.
The shares were mired in the $8.56 - $10.35 range for about 6 weeks, and all new investors - institutional and retail - were as much as 40% underwater from the March12/13 equity raise in the $12s. At that time, the Fintel site presented mostly red bars (Sells) for Pagaya with zeros for the #of shares held by an institution. Many positions were completely closed-out.
But about 2 weeks before the May 9th earnings report, the behavior of institutions towards the company shifted dramatically. Millions of shares were bought in the $10 range, and there were no sells.
After the earnings report, the buying continued until the present total (5/18/2024) is now the largest percentage (30%) of institutional shares in the company's history.
This chart below contains pre-split (1/12) share counts for earlier quarters, so I adjusted for the present level of post-split institutional shares (21,148,550) in pre-split numbers (253,782,600). The light green column on the far right of the chart is my edit of the May-24 Fintel data in pre-split shares.
As you can see, it's been a remarkable outcome, partially fulfilling one of the company's goals in coming to NY: verification of its AI platform through widespread Institutional ownership.
Institutional investors are consistently long-only, and hold for years, providing trading stability for the companies they invest in. This bodes well for a small float stock like Pagaya which might now have the future opportunity for an equity-offering that won't tank the stock like the last one did.
Because the data on Fintel changes daily, I took a snapshot of Pagaya's institutional holdings on Friday, May 17, 2024. One thing stands out in the link. Of the 98 rows, 93 are green (recent buys MRQ); 5 are white (holds); and there are no sells.
A notable new buy on the list (5/10/2024) is Citigroup (C)(CITI:CA), which now holds 1,170,587 shares of Pagaya. It has been rumored that Citi is in talks with Pagaya to interface its POS network, which includes Costco (COST)(COST:CA).
For Costco members, buying products with the brand's Citi card is advantageous because it yields a 2% discount (cashback) on purchases, in addition to the annual cash back for being a Costco member.
Millions of members probably pursue this strategy. Further, Costco is a purveyor of large - sometimes expensive ($$$) goods - that would work well for BNPL financing (Buy Now Pay Later) at the point of sale (POS).
A Pagaya (PGY) announcement of a partnership with Citigroup could be an adrenalin-spike for the shares.
Credit Performance
One of the most important aspects of Pagaya is the dual nature of its value proposition, with customers seeking credit from Pagaya partners (banks, car dealers etc) on one side, and Pagaya providing an investment arm to fund them on the other side.
At its core, Pagaya utilizes AI to comb through millions of credit applications in the FICO 685-710 range to search for that 1 in a 100 buyer of credit missed by traditional methods. This combing occurs quickly (in a matter of seconds) at the point of sale (at either a bank or car dealer, typically).
When a customer is approved, Pagaya immediately sells that approved credit to its large network of investors searching for reliable tranches of debt. It is a pass-through, with Pagaya holding under 5% of the transaction on its books in the form of risk-retention (more on that later in the article)
Pagaya has proved excellent at this. Their current ABS delinquencies are the lowest in 3 years, while retaining the performance of the average weighted coupon (WAC). This performance is occurring in one of the most difficult credit markets in decades. They are clearly outperforming the credit markets.
For investors, the reliable outcomes of Pagaya's financial network - in a nervous world of rising inflation, fluctuating credit, and Federal Reserve tightening - is highly-valued. It partially explains the increasing number (116) of investors in Pagaya's funding network for Q1'2024 (see pg 10). Pagaya has never lost a large customer. Once they have onboarded, they stayed
As Pagaya grows, it will naturally tilt towards conservatism and carefulness with investor assets. Increasingly-larger pools of funds create both risk and opportunity.
Safety of investor assets was the reason for the Dodd-Frank's retention rules (skin in the game) in the first place. Companies (and their partners) who securitize risk for investors must share in that risk. Losses in risk retention assets - and the opposite too, profits in the same - should be the canary in the tunnel for outcomes.
That is why the mention of losses in risk-retention assets (made in early March by analyst Dan Chiaverini from Wedbush) had such a chilling-effect on Pagaya shares.
It appears that has now been resolved.
FRLPC margin & Profits
In the most recent quarter, Pagaya increased its FRLPC margin (Fees Less Production Costs) for Personal loans to 6%, the largest in its history.
That figure grew year over year and sequentially, for the 4th consecutive quarter.
So investors in Pagaya have the unique proposition of a company receiving fees from an ever-increasing network of both customers and funders of its loans. Under a tight AI umbrella, one assumes that as the network grows, the granularity and reliability of data also increases (Pagaya insists this occurs) after the data is "seasoned" for a few quarters, yielding better results over time.
The total number of conversions may remain under 1 in a 100, but there are either more of them, or the level holds steady. In essence, a greater or equal quantity of approvals may convert at the same parsimonious level (<0.01), but with an increased multiplier at one end of the equation.
This fee revenue or FRLPC adds up ($$). It is the elephant in the room for the company's profitability. As long as FRLPC is growing and keeping pace with the size of the company's growing network, a virtuous circle is created: more customers + more granularity of data + improving AI results (with that data) = profits for Pagaya and reliable outcomes for its customers and investors.
Win-win.
Risk-Retention Assets
It became obvious during the Q1'24 earnings conference call that the company is addressing its percentage of risk-retention assets. Dan Chiaverini, the Wedbush Morgan analyst who downgraded the shares in March, clearly was happy that the company was seeking better ways to fund its risk-retention, and lower its percentage of risk-retention.
On the following day, May 10, 2024, he raised his price target from $11 ($0.96/share pre-split) to $13 ($1.08 pre-split), an 18% increase, while maintaining his neutral rating.
The company has said it is in late stage talks with investors to establish a forward-funding agreement for Pagaya's share of risk-retention assets. It had such a fund previously in Israel, which took approximately 2% of the risk off Pagaya's books, but that fund was closed at the end of 2023, placing the company in a temporary bind in Q1. The market knew this, and it contributed to the Q1 drama in March.
That 2% represents either profits for investors who take the risk-retention (and the profits) off of Pagaya's hands, or risk (losses) that investors would suffer instead of Pagaya. Such an arrangement requires a leveraged solution that protects Pagaya from a greater percentage of loss in its risk-retention assets, but it also costs them money ($) too.
The good news is a forward-funding agreement decreases the amount of risk Pagaya will be subject to through its risk-retention assets. And when the company achieves a positive net cash flow (estimated Q1/2025), it may no longer utilize a forward-funding agreement for its risk retention.
Also, as stated in a recent SA analysis by Ahmed Abdelazim, in a section titled Reducing Risk Retention, the author goes into considerable length describing the new mix of assets that would lead to a more favorable outcome.
Technical Analysis
It is known by technical analysts that individual companies often have a trading characteristic or predilection that analysis can measure and quantify. The idea is that the overall geometry of trading ranges (charted over time) can reflect the character of the company.
For Pagaya this trend coincides with the stock's 10 day moving average.
If you look at the above chart carefully, you will see that Pagaya's price enters a trend along its 10 day moving average (red line). And the start of that trend is usually when the red line cuts up or down through the 20 day moving average (green line).
On the day of the recent earnings announcement (May 9th) the 10 day moving average (red line) pierced up above the 20 day M/A (green line) portending the possibility of a run similar to May, 2023.
There may be some profit-taking after the post-earnings run to $13.22, backing and filling the gap-up (blank space on the chart) that begins at $11.40, but that would also be the technical "moment of truth". If the 10 day trend is to re-emerge, it could be then.
Almost ALL the institutional buying of the last month (18 million shares) has been between $10 to $12/share, and the March equity-offering itself was in the $12 price range. Pre-split, all new buy and holders are in under a $1.00/share.
So there is currently a disconnect: shares in the lowest range in the company's history, accompanied by increasing (and verified) fundamentals.
Conclusions
- Institutional investors have added 18 million shares during the most recent quarter, all at prices within $2 of the current price ($11.86). This has removed a high percentage of shares from circulation, a situation which should intensify any move on the news.
- Pagaya's Q1'2024 earnings and revenues surpassed estimates by 25%, garnering the company a Buy ranking with Zacks.
- [Tip Ranks forecast/PGY] Their most critical analyst, Dan Chiaverini, has raised his price target by 18%, from $11 to $13. The remaining 3 analysts have one year price targets as high as $42/share. The average is $25.50.
- The company has announced it is working on a forward-funding agreement. This was demanded by investors after the large sell-off in March, 2024. The company had such an agreement in 2023. Now they are in the process of reinstating it to as much as $1 billion.
- Technical analysis of the stock indicates a large trending move could be imminent.
- The company has hinted in its most recent Q1'2024 shareholder letter of late stage talks with numerous new clients who would bring millions of new customers to Pagaya.
- Pagaya is already the largest Personal Loan ABS securitizer in the US and growing.
What Could Go Wrong
The biggest danger I currently see for Pagaya is a potential news article questioning the company's use of AI in determining credit-worthiness. There was a recent subpoena from the SEC to Upstart (UPST), a Pagaya competitor, over the use of its algorithms. Both companies use AI to evaluate potential customers for loans.
That being said, everything in the company's 2024 mode of operation: their decision to report on domestic SEC forms, its nascent creation of strong alliances with established domestic financial institutions and large banks, all bodes well for Pagaya. For the company, their recent headquartering in America is a new beginning.
After all the heartache with Pagaya over the last quarter (mostly from the company's blunders of execution), the emergence of negative news articles and a re-entry of mistrust would truly be a body-blow. The share price would probably fall back into the low $9s, even $8s in a jiffy.
Think good thoughts.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
John Gilluly
I have invested for 33 years. I only write articles for Seeking Alpha when I think that there is something timely to invest in. I look for opportunities in mispriced assets that are temporarily out of favor. These investments can be very short term to long term, depending on the primary trend of the market.***Sentiment indicators factor significantly into my choices. I combine them with simple technical studies before I trade. The entry-point, its original trade date and time, has an enormous effect on the efficacy of an investment over time.***I have found that determining and following the primary trend of the market (in all time frames) is the key to successful investing: to be bullish when it is time to be bullish, and bearish when it is time to be bearish.***Fundamental analysis may be good training for the mind in assessing worthy companies, but it is not the primary reason that investors buy and sell stocks.***Like captains who steer their boats across the waves of the sea, wise investors carefully observe the movements in the water beneath them. A favorable trend can literally pull you along.***In commenting on such timeliness, Shakespeare once wrote, "There is a tide in the affairs of men, Which (when) taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures."
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PGY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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