Novastar Financial Should Profit From Falling Rates In 2H07

The US expects to see rate cuts by the 2nd half of '07. If that happens, you can expect sub-prime mortgage lenders to do well, plus savings and loans and banks such as Wells Fargo (WFC). Why? Because the margin pressure will be reduced as the overnight lending rate is cut. When interest rates fall and re-financing boom will take place then sub-prime mortgages will benefit.

The time to buy these stocks is at least one-two months before the rate cut comes. I expect a little correction in Jan/Feb for the US market, which would create a time to buy them.

I like Novastar Financial (NFI) -- it's in the mortgage business and right now people don't like it much. It has good fundamentals and a hefty dividend yield. If I had to buy it, I'd buy 25% now, 30% when correction came and the rest after it has gone up 5-8%, but cut by that much if it goes down.

Find out which professional funds hold NFI.

Comments

[Dan Jacome:]

good stuff -- you forgot to mention, however, that 33% of NFI's float is short: potential short squeeze on even the faintest of good news!

2007 Jan 02 10:26 PM

[Yaser Anwar_:]

tx Dan! I didn't have access to short squeeze info, but you're right. makes it more interesting!

2007 Jan 11 04:37 PM

[3po 3po:]

Yaser,

I don't agree with the thesis on investing in NFI -- the dividend rate. Please take a look at the cash flow statement of NFI: In 2005, Dividends Paid (202,413) Sale Purchase of Stock 140,001
Net Borrowings 318,707

In other words, the company sold stocks to pay dividend. Hello, Ponzi!

In addition, take a look at the insider sales (zero buys by the way) AFTER the stock plunged!

I am satying away from NFI -- neither long or short. But I do smell something rotten in NFI.

2007 Feb 05 04:50 PM

[A Doo Bee:]

Guess you blew that one.

2007 Mar 07 09:11 AM