rchelap

2 Stock Picks For the Subprime Mortgage Crisis

Totally agree with your DFC pick/ suggestion. Classic case of throwing out the baby with the bath water!! If you also consider the following points, DFC is at extremely attractive levels:

> The book value based on Fair Values in the latest 10K show that at Dec 31st, 2006 DFC has a book of $345 Million vs the carrying book value on the reported balance sheet of $149.6 Million. In other words, if the fair value of the financial instruments is close to what has been stated in the 10K, we are looking at a company trading at ~0.6x Fair Value book!!

> One can be assured that the management has been conservative in their underwriting standards given their significant holdings (nearly 30%+ of the company is owned by directors and execs; the CEO Hugh Miller owns 27.6%). Furthermore, some well-known value players have dug into the name in the last few months. For example, Mohnish Pabrai (a value investor with north of 25% annualized rate of retun over the last 6yrs+) currently owns approx. 20% of the shares o/s after accounting for his recent purchases.

> DFC is primarily a fixed-rate mortgage shop (92% of Q4 06 loan originations) and such loans have historically done better than ARMs in all economic cycles. Basically, the borrowers don't have to worry about their monthly rates going up and thus investors have to worry less about increased foreslosers because of this reason.

> Because of DFC's focus on credit quality within the subprime space and risk management they have been able to squeeze above average Gain on Sale margins on the sale of their loan poprtfolios. The ABS marketplace is also likely to be more receptive to their loan portfolios once they see that they are much better placed than most in the sub-prime space.

> Significantly, the existing ABS DO NOT have recourse to the company's assets unles, and only unless, there has been false documentation or fraud. The company also does not have any debt on its balance sheet.

> DFC management has displayed considerable willingness to focus on profitability rather than volume. The industry players who have blindly gone for volume at all costs are paying the price now!!

> DFC in the last Q conf call were talking about expanding their hiring given the distress in the industry and about taking market share.

> The following Q3 06 factsheet tells a good story about DFC's standout profile. Q4 06 results were pretty much in line and as expected:
www.deltafunding.com/f...

Truly looks like a bargain.

Owens Corning: Think Pink to Stuff Your Wallet With Green

Todd,

Lot of the points you made are valid and the undervaluation thesis on OC holds when you drill down. However, some of the facts you put out are off if you study the disclosure statement that was published during the bankruptcy proceedings.

The expected normalized net income is approx. $300MM+ in 2007 and 2008 each as opposed to the $600MM figure you mentioned. Also, the expected net debt (after the Jan 07 contingent payment to the Asbestos Trust ) in Dec 07 is 1.279B and in Dec 08 it is expected to be 722MM, based on projections by management. These are figures assuming no repayment of debt from the Exit financing and consequent interest expenses baked into the expected income numbers. The shs outstanding would be approx. 131.4 MM.

Therefore, the $4.61 EPS and the net cash of $12 you mentioned are both not accurate, in my opinion.

I would add that a few of the factors (based on mgmt estimates and projections disclosed in the Disclosure Statement) likely supporting the current OC undervaluation thesis are:
-An expected normalized Free Cash Flow figure in the range of $350 to $500 in 2007/2008 and beyond, under stable housing market conditions
-OC also has approx. $670MM in PV of the NOLs from the past that can be used to offset taxes. This is part of the current market cap of approx. $3.8B. Therefore, if the market cap remians the same, we are looking at an EV of 5.1B (3.8Mkt cap + 1.3 in net debt)
-Solid management incentives in place to drive shareholder value
-Operating margins approaching 8-10% going forward, again, under stable housing market conditions
-Investment Grade balance sheet with the Asbestos issues behind them

Regards,
RC