NovaStar Reverse Split Sinks Back to Mean

Includes: CFC, NFI
by: Herb Greenberg

When we last left NovaStar (NFI), on July 16, its stock was trading at a post-reverse-split price of around $30. The company had just announced a deal with MassMutual (through its Babson unit) and Jefferies for a $150 million bailout.

To repeat what I wrote at the time: Reverse splits really do little more than make a stock look artificially high than it really is. What I didn't write, but NovaStar proves so perfectly, is that after the reverse stock the prices often revert back to the mean. Its stock is now $6.80, or $1.80 pre-split. That's the lowest the stock has been in seven years.

The bigger issue, of course, is how far the subprime slime will extend. This much is sure: The new methodology being used by Moody's to rate securitized Alt-A loans, which goes into effect today, won't help matters. Moody's specifically notes the changes will cover Option ARMS. For what it's worth, Option Arms are more than a small part of Countrywide's (CFC) portfolio. (This whole mortgage mess makes you wonder whether A-rated and higher mortgage paper was ever A-rated and higher in the first place.)