Maverick’s Owner Betting Against NovaStar

Billionaire Mark Cuban says he is shorting NovaStar’s stock.

The owner of the Dallas Mavericks, who made $1.9 billion by selling his share of Broadcast.com to Yahoo.com just before the Internet bubble burst, chatted with Barron’s a few weeks back about the market and his stocks, among other subjects, while preparing to watch his basketball team play in San Francisco.

When asked by the publication about his paired trade on NovaStar, Cuban reportedly responded, “I’m hedged, leaning short.”

When investors sell short, they essentially borrow shares to sell, then replace those borrowed shares with shares purchased later — when the investor expects the price to be lower.

Cuban used a similar tactic while he held significant holdings in Yahoo.com — essentially betting that Yahoo.com’s share price would fall and maintaining his fortune as a result.

His Mavericks are currently tied at 1-1 with the Phoenix Suns in the NBA West semifinals.

But while Cuban may be happy with his playoff team, he’s not so hot on NovaStar.

“They package and resell mortgages and sub-prime mortgages,” he reportedly told Barron’s. “The short story is, they are keeping the stock up by paying dividends, and they are paying for the dividends by raising money, rather than from operations. At some point, that runs out.”

NovaStar, a subprime lender turned real estate investment trust, recently announced milestone annual production of $8.4 billion, and that its portfolio loans under management jumped 69% annually to nearly $12.2 billion at the fourth quarter’s end, generating record portfolio income and dividends.

“NovaStar continues to deliver mortgage deals that perform well for bondholders, allowing us to build successful relationships with leading investment banks and institutional investors,” company vice president Michael Bamburg said in a prepared statement. “These mortgage-backed securities provide attractive returns for the investors who fund the continued growth of our portfolio and provide nonrecourse, matched funding for our shareholders.”

The company’s shares tumbled more than $3.00 following the Feb. 8 earnings announcement to $38.74. Three days later, shares fell to $31.10 — the low over the past year — far from the $56.62 high they reached on Dec. 21, 2004, according to the Wall Street Journal.

Around this time a year ago, NovaStar found itself in a controversial whirlwind of class action lawsuits from disgruntled shareholders accusing it of artificially inflating shares, which hit a high of $67, as it continued to create the illusion that the number of its branches was increasing and that record results would follow. Allegations that were dismissed by NovaStar attorney, Lanny Davis, who called the lawsuits “false and misleading” and said he was confident that the suits would be dismissed “on their face” without the need for trial.

Additionally, the SEC also inquired about the lender’s business practices, following an article by the Journal that outlined how regulators in Nevada shut NovaStar’s branches for operating in the state without a license. The publication said the Missouri-based lender reportedly did not disclose in regulatory filings that it had paid an $80,000 fine and had inflated the number of its branches in Nevada.

Cuban is not shy of contention himself. He can often be seen yelling at referees on the court or publicly criticizing sportswriters and the NBA on his notorious blog — with some of those criticisms leading to fines by the NBA.

Recently, controversy surrounded Cuban when the NBA fined Houston Rockets coach Jeff Van Gundy $100,000 — reportedly the largest assessed against a coach — for alleging that NBA refs, following complaints by Cuban, were being too hard on Rockets’ center Yao Ming in the Mavs-Rockets playoff series, Barron’s reported.