Friedman, Billings, Ramsey Group: Revival Expected

Apr. 9.07 | About: FBR & (FBRC)

I have respected every professional I have ever dealt with at Friedman, Billings, Ramsey Group Inc. (NYSE:FBR). They are all smart, on top of their respective sectors, and right on target with the research they produce.

Quality always wins out so I expect to see FBR's stock eventually come back. Of course the problem now is FBR's exposure to the subprime market. You can't turn a corner without seeing some headline screaming about the crash of the subprime mortgage market and, included in those companies hit hard because of concerns about their exposure to this mess is, unfortunately, Friedman, Billings, Ramsey.

The subprime mortgage market, which offers no-money or little-money down loans to people unable to get a conventional mortgage due to bad credit or insufficient income, boomed in recent years, helping to push housing prices into the stratosphere, and in the process ensuring its continued popularity. To compensate for the risk, a subprime mortgage traditionally is offered at a higher interest rate than a normal mortgage, and over 80% of them are flexible ARM mortgages, whose rates traditionally jump in a few years.

This jump, coupled with the FED's rising interest rates, has caused monthly mortgage payments for subprime holders to rocket upwards in recent months. More and more people are unable to meet their payments and are defaulting on their loans. Many subprime lenders are going out of business.

While FBR's stock has dropped along with investors' concerns about the subprime market, I'm not as concerned about it as with others in this market. FBR is a boutique investment bank, and the subprime mortgage market was just one element in a suite of services it offers. Employing just 150 people nationwide, FBR's subsidiaries are involved in a broad spectrum of investment banking, brokerage services, and asset management for high income individuals and companies. It has a focus on supporting the growth of middle market companies, which as its website points out, is an under-served sector in the US.

Despite its exposure to the subprime situation, I think that this is a strong company that serves its clients well. Plus, it's been actively looking for ways to restructure and minimize the damage done to it due to the subprime bust. On March 30, it cut personnel in its subprime division.

Type of stock: An excellent boutique investment banking firm hit hard by the general market reaction to the subprime problem (as well as other previous problems unrelated to its core competency).

Price target: I think this is a stock that will bounce back. Right now, FBR is trading at $5.52, down from its 52 week high of $12.07. It may fall farther after last week's news about cutting personnel, and if it drops further, I'd go against the flow and pick this one up. We might see FBR double to $10 or higher in the next 18 months.

FBR 1-yr chart
FBR