First Marblehead Proves Us Right (FMD)

Jul.10.06 | About: The First (FMD)

We don't issue that many sell recommendations, but when we do, we mean what we say. Like when we said to sell Baush and Lomb (BOL) pre-blowup. The stock tanked 33% in a matter of days.

We now have another one of our "you must sell this stock" ideas proved right: student loan outsourcing company First Marblehead (NYSE:FMD) -- it tanked 16% on Thursday after Bank of America (NYSE:BAC), one of its largest customers, awarded business to a competitor. Today, we found out that Bank of America had been outsourcing new private student loan products to EduCap, a nonprofit that Boston-based competitor of FMD.

As we said weeks ago, FMD faces fierce competition and holds only a handful of customers -- that sort of client concentration makes us cringe. That's why we concluded our report by stating: "...we deem the risk/reward unattractive; valuation of 5.8 x sales does not help the bull case -- investors should augment whatever discount rate [WACC] they're using to value FMD because FMD has less experience, employees, and cash flow generation."

We'd love to publish the nasty emails we got for disparaging First Marblehead, but we'll have to spare you the details: this site is PG-13.

FMD 1-yr chart: