CIT Joins Zombie Stock Dance

The bonds look like a better investment.
Publish date:

Updated with CIT share price.



) -- First it was

Fannie Mae


Freddie Mac

, quickly followed by


(CIT) - Get Report

. Now,


(CIT) - Get Report

has joined the

dance of the zombies


CIT's shares jumped nearly 23% Thursday and were up big in the pre-market Friday. Should you dance with the dead? As I've already written,

CIT's bonds are the better play. They have barely moved in price from the time I wrote my story. If anything, they're down a penny.

Not surprisingly, I received a couple of emails after I wrote that story from people asking, "What about the stock?" My guess is that these days there's an even bigger group looking at the more than 200% rallies in

Fannie, Freddie

and AIG over the last month and thinking there may be similar upside in CIT.

There probably is -- over the very short term. In fact, I would guess CIT's stock will hit $2.50 and could easily pass $4. Whether it's actually worth that much longer term is a more difficult question, one I don't feel prepared to answer.

Analysts at Keefe, Bruyette & Woods and Sandler O'Neill say no. They have a $1 price target. They argue CIT could file for bankruptcy protection (which would almost certainly wipe out existing shareholders). They go on to say that even if CIT avoids bankruptcy, it may have to pay debt holders in new equity, which would probably dilute shareholders so massively, they'd end up with little or nothing of value. CIT has more than $60 billion in debt and its market cap is around $600 million, so that's a lot of potential for dilution.

CIT shares were up 12 cents to $1.68 at 1 p.m. EDT Friday.

I'm a little more bullish than they are. I'd say the potential for a Chapter 11 filing is pretty small, because, as I argue in the story in which I recommend the bonds, there are some powerful interests with deep pockets and a big stake in CIT that have a strong incentive to keep it going. Among these is the U.S. Treasury Department, which has a $2.33 billion investment in the lender.

Also, while a swap of some debt for equity seems fairly likely, it is possible that a relatively small chunk of that $60 billion gets swapped for equity. Certainly CIT has other options, such as selling assets, or swapping some of the debt for equity and then issuing new debt. Another option for CIT, as I explained in my earlier story, would be to clean up its balance sheet a bit (either through debt-for-equity swaps or asset sales or a combination of the two) and then get FDIC approval for it to start taking in deposits again through its bank.

For all of these reasons, I am confident CIT will live again, and its shares are probably worth a bit more than those of the other zombies. Still, the bonds are a far safer investment, which could have returns of 50% or more.


Written by Dan Freed in New York