Why Would Anybody Invest in a Sub-Prime Lender?

Also, are business buyers returning to the Mac?
Author:
Publish date:

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

(UCFNQ)

and

Southern Pacific Funding

(SFCFQ)

have all filed for bankruptcy. Several others, including the

Money Store

and

Long Beach Financial

(LBFC)

, were sold to banks.

What's left? Keep your eyes on

Delta Financial

(DFC)

, 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 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 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

(CPQ)

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

(PKS)

(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.