Why Would Anybody Invest in a Sub-Prime Lender?
Winner by default?
: Sub-prime lenders have turned into sub-prime disasters in recent years. The stocks of
Aames Financial
(AAM)
and
ContiFinancial
(CFN)
are shells of their former selves. And
Firstplus Financial
,
United Companies Financial
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and
Southern Pacific Funding
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have all filed for bankruptcy. Several others, including the
Money Store
and
Long Beach Financial
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, were sold to banks.
What's left? Keep your eyes on
Delta Financial
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, say several savvy investors, including some who usually make it a practice to short vulnerable finance companies. Delta, like other sub-prime mortgage companies, provides home mortgages to folks who can't qualify for
Fannie Mae
or
Freddie Mac
loans. It's an example of what happens to a company in a rotten industry that is more conservative than most of its competitors. Delta, for example, will only lend up to 75% of the value of a borrower's home.
"The key issue is that the cash-flows from the securities they create start to become positive in year three and four," says Alan Fournier, portfolio manager for
Pzena Investment Management
in New York. "Most of their competitors never made it to year three and four, and here's Delta which is experiencing improvements in cash-flows."
What's more, it's profitable. This year, analysts expect the company to earn $1.52 per share; the year after, $1.82. Yet, based on yesterday's close of 7, it trades at 75% of its book value (the economic value of its assets) of $9.60.
What if interest rates rise? That would be good news, Fournier says, "because the assets they already booked will become more valuable as prepayment speeds slow further."
If all this is true, then why does the company still have such a bad reputation among some investors? Fournier muses that many of the shorts may have remained negative on Delta as part of a blanket sell on the industry and haven't kept up with the company's improving outlook.
Mac Attack
: So, what's this about businesses starting to reconsider
Apple
(AAPL) - Get Free Report
? That's the word from Mike Kelly of
Techtel
, in Emeryville, Calif., which tracks PC buying patterns. He says his data shows that for the first time businesses are evaluating Apple products at a rate quadruple that of last quarter's. Evaluations for Apple products, he says, previously dropped for three successive quarters. The key, of course, will be whether they actually buy, and he doesn't expect to know that for another quarter. (Apple officials couldn't be reached for comment.)
Techtel's research also confirms the renewed momentum of
Dell
(DELL) - Get Free Report
. Kelly says the number of businesses considering buying a Dell is about 30% higher than a year ago, while the number considering a
Compaq
undefined
has fallen by around 60%. "Compaq's biggest problem now is failing to attract new customers," he says. "That's the typical thing that happens when opinion goes negative on fundamentals." Compaq, of course, is trying to right itself with new management.
Daytraders as gamblers
: Thanks to everybody who
offered an opinion. Little in the way of hostile reactions; most were well thought out. Way too many to deliver personal responses. (Don't ya hate my automatic -- boinnggg!!! -- response?)
Drop zone?
: If you missed yesterday's column on
Premier Parks
undefined
(sorry, I was late),
click here.
See ya
: Back in a week. Bermuda beckons. But first, it's one more visit to
TheStreet.com
on
Fox
, which airs Saturday at 10 a.m. and Sunday at 1 p.m. (What? Shill? Me? You bet. And proud of it!)
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
herb@thestreet.com. Greenberg also writes a monthly column for Fortune.
Mark Martinez assisted with the reporting of this column.
