Countrywide Financial Corp. (CFC) at a bargain
When it comes to providing home loans and services, one of the biggest names is Countrywide Financial Corp. (CFC). Founded in 1969, Countrywide Financial Corporation originates, purchases, securitizes, sells, and services prime and nonprime loans; provides loan closing services such as credit reports, appraisals and wealth of other related services. As the housing market flourished so did CFC. In the last 5 years, the stock has split three times. However, 2006 was a tough year for CFC and many other companies in the mortgage business. In looking more closely at CFC’s situation, we believed there are good reasons to be excited in 2007.
In comparing CFC with some of its main competitors such as Wells Fargo (WFC), Bank of America (BAC) and Washington Mutual (WM), it is apparent CFC is undervalued. See for yourself. The fact that CFC is trading at a lower multiple is largely due to the company’s huge exposure to the mortgage industry. As the rates of loans declined so did CFC’s earnings. On a positive note, late last year, the company adjusted its earning forecast and head count to the declining market. This move was welcomed by Wall St as it decreased the cost structure. As a result, the stock started it ascent in Sept ‘06 from the low 30s to its current level of low 40s. Despite the positive movement of the company’s stock, negative sentiments concerning the future earnings of CFC remain in question given the housing market has slowed. We view this negativity as an opportunity.
The way we look at it, housing will always be in demand. Yes, the past year and a half have been terrible if you’re in the mortgage industry, but like anything else, the cycle has a beginning and an end. The end of the last cycle was clearly 2006. Based on recent economic indicators such as strong employment number and low inflation, we believed a new cycle of growth is taking root. Moreover, as home prices goes through a correction, it is only a matter of time before people starts investing in real estate again. Of course, the day we hear housing has rebounded, CFC would be trading in the 50s. While we can’t predict the future of the housing market, we are confident the slump is about to end. Our view is CFC will rise again as soon as the housing market rebounds. Thus, we see CFC in the mid 50s by December.
Update: 2/4/07
Interestingly, a few weeks after our article outlining how inexpensive CFC is, Bank of America (BAC) confirmed they are in a merger talk with CFC. We believed CFC should fetch about $50 per share by time it is over and done. Good Luck to all you CFC investors!
Comments
Everybody inside Bofa knows that Bofa will never buy CFC. CFC has a very toxic mortgage portfolio and will explode and dive into a huge lack of liquidity due to defaults.
-All directors of CFC are heavily selling their positions on the company. 10 millions US$ per week.
- They are manipulating their stocks ..etc. SEC is investigating.
- One of the founder (30 years of CFC) left the last quarter seeing what was going to come.
Is this a good investment ? are you sure ?
Posted by: jack | February 11, 2007 02:13 AM
CFC is certainly a good investment, more so now that the recent run up has deflated. We hope it falls further so we can buy more. Thanks for your comments.
Posted by: ibooyah | February 11, 2007 07:33 AM
alot has happened in the last
45 days, do you still stnad by your position? Seems pretty apparent that the housing slump is far from over and in fact is threatening to become larger. CFC's risk exposure to the growing mortgage crisis seems more like a liability than an assets esp with all the alt a talk going around.
i was long cfc, (not only on your rec) but i cut losses and have purchased puts the other way.
Posted by: John Oh | March 29, 2007 09:03 AM
Hello John Oh:
Yes, a lot has happened. For awhile there it was looking like BAC was about to acquire CFC. However, we still are long on CFC, especially at this level. Yes, there has been lots of negatives in the sector lately, but we believed it will blow over soon.
Posted by: iBooyah | March 29, 2007 09:09 AM