Countrywide Financial and the Broad Market: Just Don't Panic

On days like yesterday, the best advice I can give is, don't panic. Panic selling just because the market gets a little scary will, more often than not, prove to be a big mistake. Every once in a while the psychology of the market takes over. Regardless of fundamentals, stock prices simply move in irrational ways. The best thing to do is simply sit tight and wait it out.

This is not to say that every stock's move lately is irrational, but a company can post strong earnings, have a good conference call, get a nice stock price bump, and then a few days later the market tanks and the shares are much lower than they were before. In the short term, psychology always trumps fundamentals.

However, if you've done your homework and are confident in your investment thesis for particular names, just wait it out. You can add to positions if you want, but that can be hard in a tape like this. Selling into the panic most likely will cause you to have called the bottom and not profited from it.

Are there any real contrarian buys out there? I would not try to bottom fish in the mortgage area. There will be a point in time where Countrywide Financial Corp. (CFC) is a buy, but I think we have a long way to go. It looks like the housing market won't improve much, if at all, in 2008. I think it's too early to jump in.

That said, the reason why CFC will be a buy at some point in the future is because of the valuation. Unlike the brokerage stocks, which could be facing peak earnings, Countrywide is staring at trough earnings and the stock still trades at a 10 P/E. It could certainly get worse before it gets better, so CFC's recently reduced 2007 guidance of $3.00 per share might be too high. Who knows, maybe they'll earn $2.00 when it's all said and done, which means there is plenty of downside left. Until housing stabilizes for a long period of time and inventories diminish, I would stay away.

All in all though, just don't panic. We've gone through periods like this before (earlier this year in fact), and things always wind up being okay longer term. Unless we see serious and sustainable ripple effects in the economy from the housing market, I am not overly concerned. However, patience is required during times like these more than others.

CFC 1-yr chart:

Full Disclosure: No position in CFC at the time of writing.

Comments

[Alan Brochs...:]

The advice that you gave regarding panic is good advice, but I would urge people to sit down, read some history and try to learn about the implications of a credit crunch. I believe if one does that and then takes a look at the charts, one would conclude don't panic and sell but rather just sell. Just my opinion (and position).

With respect to CFC, what gives you confidence that we are near trough earnings. I best one of the best things one can say is that its competitors are probably worse off. With that said, though, we have just been through the glory years of mortgage lending. Your calling the earnings "trough" sounds to me like people looking for LU EPS to rebound in 2002. When demand is pulled forward and so much turnover is taking place, it creates an artificial reality. Well, sit down and look at the numbers. As far as 1st mortgages, they are related to new purchases (existing homes and new homes) as well as refinancings. Well, look at the numbers, look at what is going on with prices, etc. Unless rates drop considerably (and assuming that borrowers can actually borrow at more reasonable LTVs , refis are dead. Clearly, purchases look dead for a while. The other piece is HELOC. While I don't have the numbers for that lending, I view it as analogous to the number of day-traders in 1999. Sorry, game over.

I know you aren't saying CFC is a buy, but I did want to suggest that perhaps your $2 number could be too high unless they cut overhead significantly. They earned less than $1 at the turn of the century - I will take the under on $2.

2007 Jul 27 05:13 PM

[Alan Brochs...:]

It has fallen from 30 to 23 in three weeks, and I think that there could be more to go. Technically, I am looking for 18.50. Fundamentally, I am sticking to what I said before: under $2. That lines up with my price expectation, maybe suggests more like 14-16. STAY AWAY!

2007 Aug 15 12:50 PM

[Alan Brochs...:]

The stock is now 17.5 in the pre-market as the company hits its credit lines (often a precursor to bankruptcy). I am left wondering why the heck I didn't short this one...

2007 Aug 16 07:55 AM