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| Symbol | Sector | Return | Exposure | Trades | Last Trade | Status |
|---|---|---|---|---|---|---|
| CFC | Mortgage Finance | -75.37% | n/a | 10 | 01-Jul-08 | Prior Holding |
25-Nov-07
Opportunity Knocks
Holding Rationale for CFC.
VALUATION COMPLETED: 11/25/07 Rating: Buy Comments: CFC finds itself in the position of being the poster child for mortgage lending gone bad. Aggressive lending, poor underwriting and a meltdown in house prices have combined to create the perfect storm. As the leading lender in the US, CFC has exposure to all that has gone wrong. As a result, their stock price has dropped from the $40s to under $10 in less than a year. With this type of action, there is either opportunity or more disaster around the corner. As with all banks, the key is to analyze their credit exposure, an determine what charge offs will occur. Assuming 7% loss on Option ARMs, 9% on home equity and 2% on all other loans, CFC should expect lifetime losses of 4.5B. This compares to reserves of 228mm. I will record a loss of 4.3B. Now the question turns to what effect this will have on the business. For CFC, it would drop them below minimum capital requirements. This would cause their business to stop functioning and could lead to a liquidation of their assets. This is where the opportunity exists. I estimate CFC's liquid book value to be $16 per share. At the current price, you are buying the company at 60% of the book value. This is too enticing to overlook. I will look at the entire capital structure and determine which method of purchasing an economic asset will yield that greatest risk adjusted return (i.e.- options, preferred stock, bonds or common stock).
Tagged Stocks: CFC
Posted at 11:56 in Holding Rationales | Permalink | Comments () | Top
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