Novastar Financial Should Profit From Falling Rates In 2H07

Dec.29.06 | About: NovaStar Financial, (NFI)

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 (NYSE: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.