Tuesday, January 23, 2007

Trading student lenders SLM ($45.0) and FMD ($52.89)

With Morgan Stanley having tactically changed its recommendation to equal weight its target price to $53 (from $55) following the sharp heavy volume selloff and dramatic underperformance versus the sector, yours truly thought it worth revisiting the short call on SLM ( first made here on September 6th anonomously) given the fact that I consider him the most competent sector analyst out there. I came away unconvinced that my own target price of $35 should be altered uness we go push out the time horizon to 2010. Then, the price target would rise to the low forties. It's clear that the relative value versus the S&P financial sector is now somewhat enhanced by virtue of its own dismal performance. (Hence I believe his tactical call.) It's a twisted way of seeing opportunities through the lens of hedge fund investors, whom, for the most part, are happy to pick at an idea if it provides some relative performance through to the March quarter. And as investment opportunities go, this stock is as likely as any financial for a short-term rebound; bonds are a bit oversold; banks have given up substantial ground since late December, and the yield is now above 2% and competes with the S&P yield. What struck me was the analyst's conviction that the real story was the growth in "private loans" (30% potential and worth $30 of the $53 a share!!!!). In my humble opinion, giving credit to a stock trading at this unusually high premium/book on the basis of "growth" in private loans is tantamount to "credit suicide". Even under the base-case scenario for 2010 of a 29% ROE, the stock would deserve a price/book of closer to 2.5 to 3x (depending on yield curve shifts) and prospective ROE assumptions beyond 2010. In fact, I would hazard a guess that the p/e will fall to the single digits like FNM and FRE did after their mercurial rise in the Nineties (and subseqeunt fall out of favor) along with SLM'a unsustainable high ROE business model. So to sum, up, if you are going to go long this idea (SLM) for a trade this quarter, short FMD ($52.89) in the interim, a short opportunity of historic proportions (more on this in past and future posts)


individual investor said...

You claim there is no one on Wall Street that can fully explain why FMD has rallied for over the last year. Well you’re right the sell side analists consistently get this company wrong, including yourself (and especially Snowling and Tiano). If you are looking for a full and proper evaluation of FMD read Tom Brown on Bankstocks.com. But since you are an expert on financial stock you should already admire TB.

All traders who have shorted FMD have paid dearly and most wouldn't be dumb enough to throw new good money away again. There have been short term opportunities for short profiting on FMD, but these were usually initiated by bad analysis from Snowling and Tiano. Investors have learned to disregard these guys.

By the way FMD major advantage over its competition and potential competition is the Teri database. This helps make FMD bonds more desirerable to bond investors. And that is a barrier to entry. TB has explained this and other FMD advantages on his website. I suggest you read it.

FIG Investor and Trader Intelligence said...

I make no such claim. I do admire to Tom Brown, though happen to disagree on the focus of his thesis. I would be interested as to what he has to say as to what is imputed by the current valuation (as far as earnings stream), and the odds of meeting those expectations in the next five years. And if they are met, what the stock "could" under that scenario (all things equal), what kind of price/book the stock would likely have (then) and what that valuation would discount about next few years. Otherwise, just watch the chart, you'll have better answers