Some analysts have said that the heyday of investing in the subprime mortgage market is over-but not Mike Diana.
The $150 billion home equity market is not going away, said Mr. Diana, who has covered finance companies since joining Bear, Stearns & Co. three years ago.
In fact, Mr. Diana has "attractive" or "buy" ratings on a handful of companies that make subprime mortgage loans.
A year and a half ago investors couldn't walk through the subprime mortgage market without tripping over a bullish analyst. But many of these same bulls have backed off, often leaving their brokerage positions for jobs advising fund companies.
Most recently Op-penheimer & Co.'s Steven Eisman cut his ratings sectorwide, saying rising prepayments and delinquencies would drive down stock prices at all home equity companies.
There are some companies with these problems, Mr. Diana said, but there's no reason to discount the sector entirely. The free fall of subprime auto stocks will not be repeated on the home equity side of the market, he said.
Investors' rapid exodus from the auto sector was due to the blowup of a company with the "biggest market cap and most conservative" lending practices, he noted, referring to Mercury Finance Co.
To have a similar impact on home equity investors, a company with the size, history, and reputation of Associates First Capital Corp. would have to implode, Mr. Diana said, "and that's not going to happen."
Some companies will, however, perform better than others, he said.
Topping his list: Money Store of Union, N.J.; First Alliance Corp. of Los Angeles; and IMC Mortgage of Tampa.
Retail originators still have a leg up on controlling delinquencies and prepayment speeds, he said.