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| Symbol | Sector | Return | Exposure | Trades | Last Trade | Status | |
|---|---|---|---|---|---|---|---|
| LEH | Investment Services | -21.78% |
|
43 | 28-Aug-08 | Currently Holding |
16-Mar-08
LEH Stock Resarch
Holding Rationale for LEH.
Valuation Completed: 3/16/08
Rating: Neutral
Comments: For financial stocks, the name of the game is clear - survival. Whenever analyzing these stocks, we need to understand the liquidity position and determine if the company will survive. With LEH, survival appears likely. They have a very conservative liquidity structure. By focusing their funding on more secure, long-term sources, LEH should whether a liquidity storm and emerge intact. While we could debate the effect reduced liquidity would have on their earnings, we can take comfort that the firm would eventually emerge from the crisis.
The earnings question affects valuation. Most of their fee generated business has dried up. At the same time, the credit crisis should limit their trading portfolio. Simply, I cannot determine where the incremental earnings growth comes from. This leads me to a conservative forecast where LEH fights for survival and eventually emerges a strong competitor.
Looking for a significant earnings drop with no upward momentum until 2010, I derive a fair value of $40 per share. Using a 30% haircut, I would initiate a position near $28. From a balance sheet perspective, I estimate book value to be $23.
Given the move required to achieve my fair value target, we should consider what a drop of that size means for this company. Having traded above $60 as recently as early February, I would need a 50% drop from that level to be a buyer. A move that large implies that either LEH's business has deteriorated or the Street questions their survival. Therefore, before committing capital, revisit your analysis and determine if the story is still intact. If you still want to buy, also look at an options strategy with limited downside risk or the preferred shares which will have a double digit yield at that point.
Tagged Stocks: LEH
Posted at 05:50 in Holding Rationales | Permalink | Comments (0) | Top
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