Buying on bad news is tough to do but this stock looks like it has been kicked around plenty and might be a good bet. IndyMac Bancorp (NYSE: IMB) is trading under a new symbol this morning, (formerly 'NDE'), reported earnings down 34% in its most recent quarter. It also gave a pessimistic outlook for its second quarter earnings.
The housing market sucks big-time and a recovery is not in sight. It is also suffering due to guilt by association with the sub-prime lending shadow which has been cast far and wide. To make matters even more dismal I was informed by two of my brokers that the short interest in IndyMac has been building all year and now stands at approximately 35% of outstanding shares, a substantial amount. Might be time to pass the ant-acid's around the room for any queasy folks out there.
Well if the key to the stock market is to buy low and sell high, I thought I would bring IndyMac to readers' attention and share what I see as a potential opportunity. The most startling thing about the stock fundamentals and something I do not ever remember seeing before, is that at yesterday's closing price of $30.24, the trailing P/E was 6.41 and the dividend yield was 6.46% - YES THAT'S RIGHT -- the Yield is higher than the P/E ratio! That's unbelievable!
So not to be foolish I immediately started checking IMB's credit-worthiness, could it cover? Moody's, Fitch, Standard & Poors, and Dunn & Bradstreet all rate the company as stable and give it a BBB from last June through the most recent by Fitch as of April 2007. The bank started in 1985 and seems like it will be fine over the long haul.
Now here is where the value is, the Price-to-Sales (P/S) is 0.84, and the Price-to-Book (P/B) is 1.19. Did you ever fall in love with numbers? Well I might be, because at a current market capitalization of about $2.2 billion I think I'm looking at buy-out bait. Given all the discussion of other mortgage banks being targeted for possible mergers and acquisitions how can you not consider this?
I'm not done yet. The Return-on-Equity (ROE) is 19.82, triple the P/E. Even if it were cut in half it is far greater than the P/E. The following is the NDE Chart. The IMB chart is meaningless today.
Clearly the stock has taken a hit in the past few months and I am not saying that this is irrational or that given IMB's circumstances unwarranted. However, the stock has dropped more than its earnings have dropped and may have over shot the mark, as is often the case on bad news. It seems to me at this time that all the bad news has been built-in to the price and that even if the stock goes nowhere for a year you are getting a high premium to hold onto it for a while and ride out the storm.
According to my readings its sub-prime lending exposure is only 4% of its business. The huge short position taken by the overall market does not make me happy because you are betting against a whole lot of folks who think this stock is going down further. I am willing to take that bet, and furthermore, if these folks are wrong, then they may be forced to cover their positions and IndyMac could see a noteworthy jump in price.
There are few things you can know for sure, but I do know that this stock is at least worth a look, if like me you are chasing value. Those of you who are new to Bloggingstocks.com can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well.
Disclosure: While writing this article a limit order was executed on IMB, so as of today I own this stock.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.
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Reader Comments (Page 1 of 1)
5-04-2007 @ 5:03PM
marc said...
The risk/reward regarding IndyMac-Barron's Online
From the "Weekday Trading" section: The worst of IndyMac Bancorp's (IMB) credit problems seem to be already discounted into the stock, and with stock trading at 1.2x book value - compared the mortgage lender's peers' 1.6x multiple - there doesn't seem to be much room for the stock to fall. Another data point on the reward side of the risk/reward equation: IndyMac's 6.5% dividend. :theflyonthewall
5-05-2007 @ 8:42PM
William Stevenson said...
The Barron's article cannot be more ignorant regarding Indymac.
The way Indymac makes money is
1. Originating as many loans as they can
2. Sell it at as high a price they can
The issue is abundantly clear:
No 1. has been shown to be impossible to achieve in 2007. Indymac themselves tighten lending standards and the home equity extraction and home buying activities declined 80%+ in the areas Indymac operates (read: California).
No 2. is another impossibility. I work in Wall St. mortgage desk and saw how mortgage backed notes and papers from these companies currently sell at DISCOUNT prices reflecting the REAL condition in the housing market. After all, if there is someone defaulting, the investor will take a hit - thus they price it in exactly as they see the data. The data is just sobering to say the least, 100-200-300% delinquency increases in Alt-A relative to last year, and still climbing. Therefore, anticipate that the remainder of the year to be bleak as far as profit from selling mortage notes to investors.
Also, being a highly leveraged investor in mortgages, such as Indymac, all it takes is 1% additional discount from their asset, to take out 20-30% of their equity's worth. Back in the 90s when the CA housing market tanks, we've got 5-10% discount on papers - just so you know.
5-06-2007 @ 12:08AM
Sheldon L said...
Bill,
Thanks for taking the time to add your detailed comment. RE 1) I agree, they will not be able to generate many loans this year and the decreasing number has hurt IMB's earnings and projected earnings. I think this is priced into the stock. Of course if 2008 is as bad as 2007, then they are going nowhere for a while. RE 2) Alt-A business is not the dominant part of IMB business.
Thanks again for sharing your insights.
Buffett Comments, see: http://money.aol.com/news/articles/_a/buffett-says-subprime-woes-contained/n20070505142709990003
5-08-2007 @ 4:09PM
Darlene Lee said...
Could a short squeeze be possible on May 10 when shorts will have to cover the dividend of .50?