Veteran Wall Street strategist Elaine M. Garzarelli says she has lost her enthusiasm for the consumer finance industry recently and has taken mortgage lender Countrywide Credit Industries off her list of favorite stocks.
The move came last week, shortly before the Calabasas, Calif.-based company disclosed record fiscal fourth-quarter earnings. Most consumer finance industry analysts are bullish on its shares.
Ms. Garzarelli took Countrywide down a notch because she considers consumer finance stocks to be fully valued right now, according to her March report. But the change does not imply the company itself will not do well, said Alida Melkonian, a senior analyst with Garzarelli Capital Inc.
Though the consumer finance sector has strong earnings growth potential, the stocks look expensive, the analyst said. "The group normally trades at a 10% to 30% discount to the Standard & Poor's 500, but currently it is trading at a 5% discount."
Ms. Melkonian said, "Countrywide shares may look attractive, but Elaine will not recommend a company in an industry which she believes is fully valued."
Countrywide is the nation's top nonbank mortgage lender. Its earnings report last week sparked upgrades and reiterations of "buy" ratings from analysts at CIBC Oppenheimer and PaineWebber Inc., both in New York, and from Sutro & Co. in San Francisco.
Still the company's shares rose only over the last week. Countrywide's stock price is up only marginally from its 52-week low of $30.8125 on Oct. 7, 1998.
Analysts argue that Countrywide's stock is cheap compared with its peers and that it is also an ideal takeout target for a bank.
Arthur K. Bender of Sutro & Co., who upgraded the company's shares to "accumulate," from "hold," on Friday, noted he did not see much upside in the stock when he picked up coverage of the company three months ago.
"However, the company is an attractive merger candidate, and I would not be surprised if it was bought out this year by a bank," he said. "There is an incentive to sell: The founders are getting near retirement age, and the stock has underperformed the Standard & Poor's 500."
Mr. Bender pointed out that the "refinance boom," in which homeowners restructure their home mortgages to take advantage of low interest rates, is coming to an end.
"And when the last refinance boom ended in 1994, there was a lot of competition and later quite a bit of consolidation," he said.
In fact, GMAC Mortgage Corp. last week announced plans to buy the operations and net assets of DiTech Fund Corp., based in Irvine, Calif., and its subsidiaries. Also, Citigroup's mortgage services subsidiary said that it would purchase One Source Mortgage Service Corp., a consumer finance company in Farmington Hills, Mich.
Gary Gordon, an analyst at PaineWebber, who reiterated his "buy" recommendation on Countrywide, said its shares are among the cheapest in the sector.
"The company trades at about 10 times earnings," Mr. Gordon said. "Its 52-week high was about $56, now it trades around $36."
Mr. Gordon also says Countrywide is an ideal takeover candidate for a bank, but says the attraction lies in its ability to maintain earnings during a slower mortgage refinancing period.
After the last refinance boom, loan origination fell 60%, but it is likely to fall just 35% this year, Mr. Gordon said.
The company has slowly but steadily diversified itself, he said, and expanded into the subprime mortgage business and overseas to reduce the effects of cyclicality.
"Last quarter one-fourth of their earnings came from nontraditional services," Mr. Gordon said.
