| Hot Tip: Subprime Stocks
Sector prime for merger activity December 8, 2003 |
| Want a good stock tip? Invest in the subprime mortgage market next year. That’s the word on the street from financial analysts who follow the companies that make subprime loans.
While forecasts are for fewer originations in 2004, the slide comes against the backdrop of a red-hot pace the last few years. So, the strong 13% or 14% growth expected next year, pales against the 30% of 2003. “We won’t see the insane growth we had this year,” says Todd Pitsinger, financial services analyst at Friedman Billings Ramsey & Co., Arlington Va. “But there will be a sustainable growth rate of ten to fifteen percent over the next several years.” Pitsinger’s firm tracks most of the subprime mortgage companies and covers Saxon, Accredited and New Century among them. (Tracking is more casual than coverage.) Bob Napoli of Piper Jaffray, a Chicago brokerage firm, says performance next year “depends on the individual company — how they execute.” His firm covers Accredited Home Mortgage, San Diego, but tracks many others including those with subprime operations including: Citigroup, New Century Financial Corp., Saxon Capital Inc., Countrywide Credit, Washington Mutual. The sector, as a whole, should do reasonably well, Napoli expects. The biggest risk factor, he sees, “is whether competition remains rational or gets greedy and [companies] shoot for the fences at the expense of pricing and discipline.” Less a problem with publicly held companies — whose shareholders provide a significant element of constraint — the biggest risk is with large private companies, says Napoli. He does not envision wild swings a la late-1990s, however the analyst says there may be some companies with the “conquer the world at all costs mentality,” which would be irrational. That could hurt other players in the market, he says, serving to slow earnings growth at the more disciplined firms “until the irrational companies disappeared or became rational.” Such conditions were addressed awhile back by Brad A. Morrice, vice chairman, president and chief operating officer, New Century in Irvine, Calif., when he said margin pressure could develop as loan volumes hold up but value on the secondary market goes down. Morrice foresees a concentration of market share among top subprime lenders, with a continuation of rising rates “probably playing into that trend.” Pitsinger, of Friedman Billings Ramsey, also sees merger and acquisition activity heating up, as smaller companies benefit from larger companies’ interest in more volume. “All top 25 publicly traded companies are potential targets,” he says. Bob Napoli of Piper Jaffray agrees. “Over the next couple of years, some good monoline oriented subprime mortgage companies could be targets for acquisition by larger more diversified financial institutions with greater access to cheap capital.” Citigroup and JPMorgan, for example, “have always had an interest,” says Napoli. In addition, Wells Fargo, ABN AMRO and Barclay’s Bank could be buyers. As to whom they would acquire, Napoli answers only: “In general, the well-run monolines could be attractive.” Mike Sawyer, chief executive officer, Saxon Capital Inc., Glen Allen, Va., thinks subprime lenders are in the early stages of an 18-month period of robust performance. Sawyer is upbeat. “There are still a lot of customers for us to make good loans to,” he declares, noting that his company is a portfolio lender and, as such, “we will have lot of cash when some of our competitors suffer crunches.” Related story: |
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Neil J. Morse is a communications consultant and independent writer working exclusively in the mortgage finance industry. He resides in Newtown, Conn. and may be reached by e-mail at: morse@ntplx.net |
