Analysts who follow subprime lending say that more care than ever is required when investing in the sector, but investors need not jump ship.
Now is not the time to "bail out," said Katrina Bletcher, an analyst with Gruntal Securities, New York. "It's a strong sector," she said, but investors need to choose companies carefully.
Stock prices of the major specialty finance companies continue to fluctuate wildly since Green Tree Financial Corp.'s restatement of earnings sent them tumbling Nov. 13.
Some, like IMC Mortgage Corp., Tampa, continue to lose value, while others, like Delta Financial Corp., Woodbury, N.Y., have made a complete recovery.
Green Tree, Jacksonville, Fla., announced Nov. 13 that it was taking a $150 million writedown to compensate for faster-than-expected prepayment speeds. The move spooked many investors, and some said they might abandon the sector entirely.
But many analysts are viewing the drop as a buying opportunity, as long as investors shop with care.
"You have to pay attention to the fundamental analysis," said Ed Najarian, an analyst with Wheat First Butcher Singer, Richmond, Va.
Since Green Tree's writedown, Mr. Najarian has initiated coverage of Delta Financial Corp., Money Store Inc., and Emergent Group Inc., with "buy" ratings.
"I've picked companies that have had a substantial decline because of concerns about the sector in general, but are managing the risk conservatively," he said.
Mr. Najarian has put a 12-month price target of $39 on Money Store. The company's stock was trading at $25.0625 Wednesday.
"There are some other companies in the sector that are going to have problems down the road," Mr. Najarian said, "but there are some strong conservatively managed companies in the sector."
Investors should pay careful attention to assumptions lenders make about how their loan pools are going to perform, Ms. Bletcher stressed.
On Nov. 26 Ms. Bletcher reiterated her "strong buy" recommendation for Southern Pacific Funding Corp., a Lake Oswego, Ore.- based subprime mortgage lender.
The company has been "carefully adjusting" its loan pool assumptions for prepayments and will not have to take a massive one-time hit like Green Tree has.
Green Tree continues on a downward path in the stock market. The company has lost about a quarter of its market value since its writedown announcement, falling from $40.375 to $30.375 in late trading on Nov. 26.
Analysts' recommendations since the company's writedown run the gamut. Morgan Stanley analyst Jennifer Oliver Martin upgraded Green Tree to "strong buy," and Sands Bros. analyst Michael Goldberg downgraded it from "buy" to "neutral."
