Looking for opinions on a stock...

[Glenn Quagmire]

Hi all,

I was wondering if I could get some feedbacks/opinions on a stock I've been looking at for a while. Let me start by saying I'm far, far, far from an expert when it comes to stocks. I currently only own 3 stocks, but I've been saving some money waiting/hoping to pick up some good, undervalued companies in this down market.

Having said that, the stock I've been looking at is commercial mortgage lender, CapitalSource, Inc. (CSE). Here are a few reasons I'm intrigued:

1) The stock is trading at less than $15. This is down from it's 52-week high of $27.40. In fact, it was even trading at less than $10 just a few weeks ago.

2) The dividend yield is ridiculous. Upwards of 18 or 19%.

3) Some more numbers... in the last 12 months they've had sales of 1.5B, income of $176M, and a net profit margin of roughly 11.5%.

4) They recently purchased Fremont General's retail banking operations. This gives them access to another $3B of loan funding.

5) I work in the mortgage industry and can tell you, firsthand, that this is a well-run company. They have a very conservative underwriting style and a solid actuarial team.

6) This is a COMMERCIAL mortgage lender. Unlike the residential mortgage industry, the commercial mortgage industry is doing just fine. I don't think a lot of people realize that. I also think this is stock is getting dragged down due to the recent credit crisis. I'm not sure that's warranted.

7) The majority of CSE's portfolio is assisted-living facilities. We, as a country, are getting older. I certainly don't see the need for ALFs going away. I think they have carved out a nice little niche for themselves in that respect.

Like I said, I would love to hear opinions/thoughts on this company from those who are much better at this than I am. Thanks for taking the time to read...

 

[selkirk]

Greetings Glenn had a quick look at CSE, now the dividend is to high.

1. When you see a stock that has a dividend that is double what is available in the entire industry, then you should assume it will be cut. This seems priced into the stock, at least a 50% dividend cut, however a high 16% yield probably means a cut is coming.

2. the company has low credit ratings, now it is very important these are not cut any further by the rating agencies.

3. only have a few investments in US financials and one question is what will the credit markets be like going forward. is the environment like early Jan or worse....then the stock goes down. or does the credit markets improve then this will probably go up..

4. some positives is they are trying to secure billions in deposits, this will be a more stable form of (credit) available to them.

also they just secured a billion in funds, if this continues and they can get more money from deposits.

- would be concerned because though the fed is trying to provide liquidity believe they will have to stop lowering rates, and even raise rates. you cannot have oil and metals hitting all time highs on a daily basis....you cannot have non core inflation running 8-10%. if this continues they will have no choice but raise rates. the fed cannot allow infaltion of 5% or higher, well you can however that just kills the economy.

they seem to be doing some decent steps however I do not know anything about commercial real estate in the US.... also it often depends on the region, commercial and residential. some avg./good, some terrible and getting worse.

good luck with your research, and the stock.by the way it is trading between high and low low 7.56 high 27.40

not sure what you other stocks are however make sure you have them in different industries and sectors, would not want all 3 stocks in the same sector.....

thanks
selkirk

 

[Glenn Quagmire]

Selkirk,

Thanks for posting your thoughts. I have heard quite a few people say that the dividend would be cut. I didn't think it would stay as high as it is, but even at 50% I like that number.

I'm still taking a wait-and-see approach with this stock, for many of the reasons you mentioned. The future of the credit market is very uncertain so I will bide my time. I always come away impressed with CSE's business approach though. Rather than take on a lot of loans with iffy criteria, they do their due diligence and only take quality loans. That may sound like common sense, but the residential market is in turmoil because many lenders never learned that lesson.

Fortunately the stocks I own (CTRP, KMX and UNH) are in different sectors. UNH and KMX I haven't held very long, but CTRP I've had for about 3 years. I've been very lucky with that stock. I plan on owning that one forever, unless something drastic happens.

Thanks again for taking the time to post. I appreciate it.