Tuesday, January 8, 2008

Countrywide Financial – Is it a Buy?

While checking the news online during lunch, I noticed Countrywide Financial (CFC) had taken beating in the market. Later, I learned they were denying rumors of bankruptcy. Having fallen to $5.43 from a 52 week high of $45.26, it might seem CFC is a buy. Without going into a detailed financial analysis, lets look at sources of pleasure and sources of pain for CFC shareholder:
1. Countrywide has a well-know brand name with multiple channels for bringing in business.
2. At the current price, the dividend provides a huge yield to common stock shareholders.

1. While it had something like $35 billion in current assets in September 2007, its current liabilities were in the neighborhood of $83 billion. When Current Assets < Current Liabilities, you have significant bankruptcy risk if you do not have ready access to ST borrowings.
2. To support its short term borrowing, CFC has been using its long-term assets (re: mortgages) as collateral. Since the mortgage market is in trouble, their collateral is in trouble and their access to short-term borrowing must be impacted.
3. While hard companies like General Motors or US Steel have hard assets to fall back on, Financial stocks are literally made of paper. If the paper becomes worthless, they become worthless. They can and do implode quickly and leave investors holding the bag – See Enron.

Conclusion: I don’t have the time to go over CFC’s SEC filing with a fine toothcomb. Despite the attractive price of the stock, it continues to have significant short-term downside risk and little upside opportunity until the mortgage market stabilizes. While some Wall Street wizard is probably doing the work to justify an investment and will make a killing, I am going to sit this one out for now. I will, however, continue to look for the right financial for my portfolio.

No comments: