Time to buy Countrywide Financial (CFC)
10-18-2007: Bad news keeps coming for Countrywide Financial. Just when you thought the worse is over, the CEO is now in hot water over the sale of CFC stocks right before it tanked in August. The SEC is investigating the matter. Stock is down another 4%. Whether guilty or not, this CEO will likely be push out in the next six months. We suspect the next obviously bad news is shareholder lawsuits, if there isn’t one already. Despite all these negative news, we actually see an opportunity worthy of consideration.
We believed CFC is currently cheap enough to get in at current price. The negative market sentiment has already been baked in so the downside risk is reduced. While most believed the housing market will continue to suffer and the worse may yet to come, we believed the demise of CFC is overblown. Trading at $16.50, CFC is trading with a P/E of 4.60, which is quite low compared to its peers. We recognize P/E is not the only factor to consider here, but one cannot argue the stock is definitely quite cheap.
Countrywide is the largest mortgage company in the U.S so a lot is at stake. The fact of the matter is the government cannot afford for CFC to go under. Case in point, a few months ago, the government pumped billions into the company so they can continue to operate. The government understands that if CFC goes out of business, a lot of folks will be in a world of hurt. For this reason alone, we believed the government will continue to step in and throw the company a life raft until CFC is able to get a grip. We see the current weakness as an opportunity to buy at the bottom.
Our take is CFC will eventually get their house in order soon, which should push the share prices back up to the mid 20s (3-6 months). The CEO being investigated is a red herring. Smart investors should be looking to buy CFC during these confusing and scary times.
Update: 10/26/07, It appears CFC has reached bottom. While they post a lost in thir 3rd quarter, CFC is projecting a return to profitability in the 4th quarter. A lot of this is because of layoff and some stability in their business. This report is from Reuters. We still believed at current price, CFC is a good investment for the long term.
Comments
What a bunch of crap. You have no idea how much CFCs business is hurting. CFC has lost market share, profit margins, its most profitable mortgage products are unsellable, and teh market has shrunk. They have not provided guidance on mortgage writedowns, and they have a lot of mortgages thay will be written down.
The BAC deal requires annual payments of 7.25% interest and dilutes the stockholders by adding 16% more shares.
The housing slump is continuing, and CFCs will continue to lose money, which they cannot afford. Their credit lines are maxed out and their bonds are one step away from junk. They have the most expensive mortgages in the industry.
A CFC collapse will be bad but it is unavoidable at this point. Already, BAC, JPM and other banks are picking up CFCs business. The only thing CFC has to offer is the mortgage servicing business, which will probably be picked up by BAC. Thats why they provided the secured loan/equity "investment" of $2B.
Your advice to buy is foolish. Absolutely dumb. Its obvious you dont really know much about CFCs business or the status of the housing market.
Posted by: dan | October 18, 2007 02:03 PM
Dan,
Everyone is entitled to their opinions, your included. We recognized the housing market is in a bad shape and might get worse. With that said, we believed CFC at current level is attractive and is or near bottom. Take it for what's worth. CFC will pull through this mess, that is our view.
Your thoughts are welcome, but let's keep it clean. There is no need for name calling.
-ibooyah
Posted by: ibooyah | October 18, 2007 02:51 PM
Yesterday I took a position on CFC. Of course, now it's dropping faster than Rosie's credibility with Bill O'Reilly. Are you still mid-term bullish on CFC and how do you view this stock now roughly two after your post?
Thanks
Posted by: Adam | November 1, 2007 05:51 AM