iStar Financial( ( SFI)

When you're carrying more than $8 billion in debt, it's crucial that your cash flow stays strong to cover principal and interest payments. So when iStar, a major lender to commercial real estate developers, noted this summer that more than 40% of its clients had stopped making payments, short sellers started to smell trouble.

By September, iStar conceded that it may need to seek bankruptcy protection. That's like manna from heaven for short sellers. But they'd soon be disappointed: iStar announced in late October that it was able to raise cash by selling some major loans it held, and that in turn would keep its own lenders at bay for a while longer.

The course is still tricky. A June 2012 bond was recently paid off, but iStar still needs to come up with roughly $3 billion more to pay off debts in 2011. Alternatively, the company could seek to extend the expiration of its 2011 obligations, a task that is now much easier in light of a somewhat stronger balance sheet. That move appears increasingly likely, so the bankruptcy risk should go away. But is the stock undervalued after the recent rebound? Yes -- with caveats.

iStar's real estate loans were worth more than $11 billion a few years ago, but the company has had to write off roughly $5 billion of that amount. If the commercial real estate sector starts to rebound (a real possibility if employment picks up and companies need more office space), then much of those write-downs could be written back up.

iStar's equity is now worth just $500 million, and a $2 billion to $3 billion write-up in the next few years could push the company's equity value back up to $1 billion or even $2 billion (iStar's equity was worth $4.5 billion before the economy tanked). Any fruitful discussions about loan extensions could push shares up 50% toward $8, and a materially stronger economy could push this stock to $15 or $20.

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