First financial stock is very hard to track its real value, you have to trust management of financial company a little bit, meaning they are conservative on their book keeping, like conservative about their provision for bad loans, estimation of future income and so on.
second financail stock has complicated structure, usually has leverage built in, its value is rather sensitive to interesting environment.
third, even if management is conservative, they can still make wrong judgement calls on their financial activities, like recent subplime industry crisis, some management may not be able to resist huge profit showing up on their competitors' books and follow the same kind of practice.
fourth, it is easier for financial business to cover up fraud activities.
I am not an expert on financial industry at all, i am not a cpa, and I do not bother to read annual report of financial stocks since I think I would not understand them, or even if I understand, the next people in line would be able to understand too and I would not have any advantages.
So then why I am recommending this financial stock FMD? first I rely on a financial expert's opinion, he is a hedge fund manager: Thomas K. Brown. His specility is in banking, financial industry, he has a website called www.bankstocks.com. His fund owns 3,267,849 shares of FMD at 3/31/07. he published his opinion on FMD on his website. Here is a recent one:
http://www.bankstocks.com/article.asp?type=&id=9881368
second, I believe FMD has a very good business model, it operates on private student loan industry, student loan is quite different from other commercial loans, since student usually do not have any income or assets to cover their loan, banks usually do not have specialty in assessing student loan risks, they would turn to FMD who has a proprietary database with 20 years student loan history. So I would call this a moat for FMD. It is difficult to build a database of such long term. On the other hand, banks generates student loans, but they do not carry the loans on their book, they sell the loans to secondary market, so they will not build up a database of student loans, payment histories since the loans are gone.
third, private student loan industry grows at about 30% a year thanks to rapid increasing tution costs, and government's cut on student financial aid because of budget imbalance. FMD has been able to grow its business quite impressively for the last couple of years. FMD's last quarter's revenue is 180 million, compared to 100 billion student loan industry, FMD has a great future.
fourth, consider its growth and earning, FMD has a extreme low valuation, I believe its p/e is under 10, for a rapid growing company, it is very cheap.
fifth, there is a coming hidden increase of income that has not been accounted by the market by my belief. FMD securitize student loans and sell them to the secondary market. FMD keep a reserve to provide for bad loans, namely students did not pay back their loan. After a couple of years, student payment situation becomes more clear, the reserve maybe released and become FMD's income, this is called "residual". I may not get the picture of residual completely right, somebody from financial industry may give a better analysis, but I know this is a big number that are about to hit book in a couple of years. Just think like this, this residual thing is a bonus, if you do not get it, it does not hurt.
Risks, why FMD is so cheap? concentration of customers represents a big risk, top 2 or 3 customers represent about 50% of FMD's revenue. But FMD has been diversifying its customer base, adding new banks, credit unions as their customers, second, it is not that likely that big banks will abondon FMD, this is only my belief after quite a few readings, you can search bankstocks.com for explanations. Actually, the recent violent 20% drop of FMD is due to Sallie Mae being acquired by a private equity firm plus two of its biggest customers: JPM and BAC. Sallie Mae is FMD's biggest competitor and market worries that two big banks will take their fmd's business to Sallie Mae. I believe there is a risk here, but its probability is low, one of bank has a one contract with FMD, I think the other one has a 3 year contract. The most important thing is that 2 big banks is minority shareholder of Sallie Mae, if they take business to Sallie Mae, the earning would show up on Sallie Mae's book directly, not on bank's book. Banks have to sell their Sallie Mae's shares to realize the gain. I think I read this from bankstocks.com.
Another angle to look at this risk would be from share price. The rumor that big banks would take away their business has beening circulating for years, and that is why FMD dropped to a low about 15 in 2005, I think all participants in the market and has discounted this potential risk.
FMD itself thinks its shares are undervalued, it announced to buy back 10 million shares.
FMD also has a divident, currently at 1.6%, it is rare for a small growing company to distribute divident.
FMD's insider has a large stake on its business, I forgot how many shares they own.
This would be a long term holding, mid term would be aiming at recover from oversold of last Sallie Mae buyout news, short term, I do not know although my guess it is ready to climb, it has stablized and showed strength.
Do your own DD, please.
Disclosure: long 100 shares, short 4 09/2007 35 puts, short 2 09/2007 50 puts. My 50 puts currently show a paper loss, shorted before Sallie Mae news.
second financail stock has complicated structure, usually has leverage built in, its value is rather sensitive to interesting environment.
third, even if management is conservative, they can still make wrong judgement calls on their financial activities, like recent subplime industry crisis, some management may not be able to resist huge profit showing up on their competitors' books and follow the same kind of practice.
fourth, it is easier for financial business to cover up fraud activities.
I am not an expert on financial industry at all, i am not a cpa, and I do not bother to read annual report of financial stocks since I think I would not understand them, or even if I understand, the next people in line would be able to understand too and I would not have any advantages.
So then why I am recommending this financial stock FMD? first I rely on a financial expert's opinion, he is a hedge fund manager: Thomas K. Brown. His specility is in banking, financial industry, he has a website called www.bankstocks.com. His fund owns 3,267,849 shares of FMD at 3/31/07. he published his opinion on FMD on his website. Here is a recent one:
http://www.bankstocks.com/article.asp?type=&id=9881368
second, I believe FMD has a very good business model, it operates on private student loan industry, student loan is quite different from other commercial loans, since student usually do not have any income or assets to cover their loan, banks usually do not have specialty in assessing student loan risks, they would turn to FMD who has a proprietary database with 20 years student loan history. So I would call this a moat for FMD. It is difficult to build a database of such long term. On the other hand, banks generates student loans, but they do not carry the loans on their book, they sell the loans to secondary market, so they will not build up a database of student loans, payment histories since the loans are gone.
third, private student loan industry grows at about 30% a year thanks to rapid increasing tution costs, and government's cut on student financial aid because of budget imbalance. FMD has been able to grow its business quite impressively for the last couple of years. FMD's last quarter's revenue is 180 million, compared to 100 billion student loan industry, FMD has a great future.
fourth, consider its growth and earning, FMD has a extreme low valuation, I believe its p/e is under 10, for a rapid growing company, it is very cheap.
fifth, there is a coming hidden increase of income that has not been accounted by the market by my belief. FMD securitize student loans and sell them to the secondary market. FMD keep a reserve to provide for bad loans, namely students did not pay back their loan. After a couple of years, student payment situation becomes more clear, the reserve maybe released and become FMD's income, this is called "residual". I may not get the picture of residual completely right, somebody from financial industry may give a better analysis, but I know this is a big number that are about to hit book in a couple of years. Just think like this, this residual thing is a bonus, if you do not get it, it does not hurt.
Risks, why FMD is so cheap? concentration of customers represents a big risk, top 2 or 3 customers represent about 50% of FMD's revenue. But FMD has been diversifying its customer base, adding new banks, credit unions as their customers, second, it is not that likely that big banks will abondon FMD, this is only my belief after quite a few readings, you can search bankstocks.com for explanations. Actually, the recent violent 20% drop of FMD is due to Sallie Mae being acquired by a private equity firm plus two of its biggest customers: JPM and BAC. Sallie Mae is FMD's biggest competitor and market worries that two big banks will take their fmd's business to Sallie Mae. I believe there is a risk here, but its probability is low, one of bank has a one contract with FMD, I think the other one has a 3 year contract. The most important thing is that 2 big banks is minority shareholder of Sallie Mae, if they take business to Sallie Mae, the earning would show up on Sallie Mae's book directly, not on bank's book. Banks have to sell their Sallie Mae's shares to realize the gain. I think I read this from bankstocks.com.
Another angle to look at this risk would be from share price. The rumor that big banks would take away their business has beening circulating for years, and that is why FMD dropped to a low about 15 in 2005, I think all participants in the market and has discounted this potential risk.
FMD itself thinks its shares are undervalued, it announced to buy back 10 million shares.
FMD also has a divident, currently at 1.6%, it is rare for a small growing company to distribute divident.
FMD's insider has a large stake on its business, I forgot how many shares they own.
This would be a long term holding, mid term would be aiming at recover from oversold of last Sallie Mae buyout news, short term, I do not know although my guess it is ready to climb, it has stablized and showed strength.
Do your own DD, please.
Disclosure: long 100 shares, short 4 09/2007 35 puts, short 2 09/2007 50 puts. My 50 puts currently show a paper loss, shorted before Sallie Mae news.
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