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H&R Block (NYSE:HRB) is selling its subprime lending unit, Option One Mortgage, to an affiliate of a private equity firm. There are two things we want to point out regarding developments within subprime lending:

Diversified lenders are selling out of the sector while those remaining must still contend with a difficult operating environment. While consolidation is likely to reduce competition within subprime, sales of subprime units simply shift the risk to a new firm, typically at a discounted price. Thus, we would sell short the shares of those players remaining in operation within the subprime sector and without significant diversification of risk. Those firms' shares are seeing appreciation on news of these sales by peers, but we contend that the earnings reports of still at risk firms will shed light on the subprime specific weakness that remains. So, the share rise offers opportunity for short entry into subprime pure plays.

Clearly, firms that have or can sell subprime operations may offer upside opportunity, but remember you don't get the best price on forced/pressured sales, so the value add may be questionable. For some of these firms, like perhaps Fremont General (FMT), the alternative was bankruptcy risk, so the sale made sense in our view.

Source: Defining Two Camps Of Subprime Lenders