Friday, May 18, 2007
Subprime woes create mortgage opportunity
Neil George has an uncanny knack for seeing below the surface, often finding hidden values or investment opportunities that others have overlooked.
One example from his Inner Circle -- a premium service designed for more sophsticated investors -- is his recent foray into mortgage lenders that have suffered from the subprime fallout.
“Our plays on the overreaction to the subprime loan fiasco are right on track and doing well for us. We’re up approximately 15% on American Home Mortgage (NYSE: AHM) and a bit more than 12% on NewCastle Investment (NYSE: NCT).
“American Home Mortgage has a chunk of its portfolio in so-called ALT-A mortgages. ALT-A loans are for borrowers with solid credit scores but include some non-traditional income and non-traditional properties in their mortgage applications.
“There’s some risk here, but let’s put it into perspective. The nationwide rate of delinquencies in ALT-A is running at 0.5% on a 90-day basis.
“Most big commercial banks would be thrilled with corporate borrowers posting such a record. And the ALT-A delinquency rate is less than 20% of that for subprime. This isn’t the same problem.
“Foreclosures represent a tiny fraction of the overall market -- approaching only a sixth of the rate for subprime. American Home Mortgage is a well-managed company holding a good portfolio. With some quick money sitting on the table, we’re still buying more.
“New Castle has even less exposure on the issue of lower-graded debt. But like others in the market, it’s been slashed by the same claws and blood is spurting.
“Buy both American Home Mortgage and New Castle for the return of reality in their share prices in the shorter term. We'll be thrilled to pick up some monster dividends along the way. Both mortgage stocks are buys at the market.”
posted at 11:52 AM
