With Morgan Stanley having tactically changed its recommendation (equal weight) and target to $53 (from $55) following the sharp (and not insignificant heavy volume) selloff (and dramatic underperformance versus sector), yours truly thought it worth revisiting my short call on SLM Corporation (Sallie Mae) (NYSE:SLM), given the fact that I consider Morgan Stanley the most competent sector analyst out there. I came away unconvinced that my own target ($35) should be altered, unless we go out to 2010 with his ROE of 29% (mine estimate 20% to 25%); then my price target would be in low forties.
It's clear that the relative value versus the S&P financial sector is now somewhat enhanced by virtue of its own dismal performance. (Hence I believe his tactical call.) It's a twisted way of seeing opportunities through the lens of hedge fund investors, who, for the most part, are happy to pick at an idea if it provides some relative performance through to the March quarter. And, as investment opportunities go, its as likely as any financial for a short-term rebound; bonds are a bit oversold; banks have given up substantial ground since late December, and the yield is now above 2% and competes with the S&P yield.
What struck me was the analyst's conviction that the real story was the growth in "private loans" (30% potential and worth $30 of the $53 a share!!!!). In my humble opinion, giving credit to a stock trading at this unusually high premium/book on the basis of "growth" in private loans is tantamount to "credit suicide". Forget HR5, forget MonteCarlo (simulation) unless you are going there for blackjack, and forget Modelware for now. Even his base-case scenario for 2010 of 29% ROE would deserve a price/book of closer to 2.5 to 3x (depending on yield curve shifts) and ROE assumptions beyond 2010.
In fact, I would hazard a guess that the P/E (I hate this measure) will fall to the single digits like Fannie Mae (FNM) and Freddie Mac (FRE) did after their mercurial rise in the Nineties, and subsequent fall out of favor along with sustainable high ROE business models. So to sum, up, if you are going to go long this idea (SLM) for a trade this quarter, consider shorting The First Marblehead Corporation (NYSE:FMD) ($52.89) in the interim -- a short opportunity of historic proportions (more on this in past and future posts.)
Disclosure: The author has positions in SLM and FMD.
SLM/FMD 1-yr comparison chart