When to Buy NFI??

[OrangeHeat]

I see NFI is taking a sympathy dip with Washington Mutual......Is this a good time to pick this one up??

I am thinking its a good buy oppurtunity when it bottoms and makes a decent trend back up on moderate volume?

This thing has done well as of late and I would hate to buy high and sell low..

[adios]

That's a tough one. You should be aware that NFI generates earnings more or less from the carry trade i.e. they borrow short and lend long. A flattening of the yield curve will probably impact their earnings some. A year ago it was around $15 a share (split adjusted). I would think it's much more inline with a reasonable valuation. If it went to $25 I think it's a screaming buy. Many expectations for a divi increase. Divi announcement on the 19th. I think it's a reasonable buy at today's prices. I sold 2/3 of my position at around $44 basically to take a big profit. I've still got a 1/3 and may trim another 1/3 of that. After that I'm just holding it for the long term.

[AceHigh]

I wouldn't say it's a bad time to buy. With a yield of 12.5% it can't be too bad a play. Check the dividend dates on this stock. If I remember correctly the dividend comes out at the end of this month, then there is a special dividend at the end of January or beginning of Febuary. So if the special dividend is decent it might be a good time to buy.

[squiffy]

It looks like a lender, primarily mortgages. The reason it has a high yield is that it was probably making huge profits over the past 3 years. But the building boom and mortgage lending boom, which tend to be cyclical, are probably coming to an end. If the economy starts to improve interest rates will rise. This will make it harder and harder for people to borrow money to buy homes.

Home builders and mortgage lenders are already starting to tank. One builder HOV dropped $3 a few days ago. They have been high flyers for about 3-5 years or so. Doubt they will continue to go up.

As a matter of fact, it would be smarter to short builders and mortgage lenders.

Already reading stories about how many people are being laid off by mortgage lenders like Countrywide.

Don't think this would be a good idea to buy now. But, as always, it is almost impossible to time the cycle perfectly. So you may be able to make some money. But very risky.

[adios]

"It looks like a lender, primarily mortgages."

NFI is a mortgage REIT that is involved with all aspects of mortgage loans i.e. origination, warehousing and servicing. They're primarily involved in lending to sub prime home buyers. They either sell or securitize the loans they originate through Collateralized Mortgage Obligations (CMO's). As I stated earlier they make their money by capturing the spread between short term and long term interest rates. Basically they assume credit risk and defer almost all interest rate risk. They're market share is very, very small when compared to Countrywide for example.

"The reason it has a high yield is that it was probably making huge profits over the past 3 years."

Yep but it's at the lowest yield in years.

"But the building boom and mortgage lending boom, which tend to be cyclical, are probably coming to an end. "

Depends on what you mean by coming to an end. The demograhpics in the US suggest that residential real estate will continue to grow.

"If the economy starts to improve interest rates will rise. This will make it harder and harder for people to borrow money to buy homes."

Well that's a double edged sword. As more people improve their financial situation due to an improving economy, it puts more home buyers in the market. Really residential real estate has never really tanked due to higher interest rates that I know of. Localities have seen their residential real estate decline due to slow economic conditions in that particular area. What has and will slow down if mortgage rates rise is refi's.

"Home builders and mortgage lenders are already starting to tank. One builder HOV dropped $3 a few days ago. They have been high flyers for about 3-5 years or so. Doubt they will continue to go up."

HOV has a PE of 11 and I would suggest that indicates some pessimissm given the earnings rise they've had.

"As a matter of fact, it would be smarter to short builders and mortgage lenders."

Personally I think that's a crazy idea. First of all why short companies with low PE's with some paying high dividends with growing earnings and second why go short when you could go long something else? Good god owning residential real estate is part of the American dream.

"Already reading stories about how many people are being laid off by mortgage lenders like Countrywide."

Haven't heard of layoffs at Countrywide but there were layoffs announced at Washington Mutual and Washingtion Mutual lowered guidance. Countrywide reaffirmed guidance for 2003 and 2004. NFI FWIW raised guidance recently for 2004. NFI will continue to generate earnings from it's portfolio of securities for the next two years as well.

"Don't think this would be a good idea to buy now. But, as always, it is almost impossible to time the cycle perfectly. So you may be able to make some money. But very risky."

Could be but I can think of a lot riskier stocks than many of these low PE high dividend payers. Countrywide has a PE of 7.

[squiffy]

PE is a very deceptive ratio. Mortgage lenders have low PE's because their profits have been unusually high and rising rapidly. This probably won't continue. Earnings have been at record highs for the past 3-4 years. As with any industry the cycle will peak.

As I said. Countrywide and others have already seen huge declines in mortgages loans and are laying people off. New home starts I believe are declining.

Fewer homes built, higher interest rates, fewer mortgages and refis.

You cannot look at PE and assume it is a static ratio. As income and earnings decline PE will increase.

Let's agree to see how mortgage lenders and homebuilders are doing 1, 2, 3 years from now.
Are their prices at a peak or at a low? I think closer to a peak, meaning the top of the cycle, meaning you will be buying high, not buying low.

And regarding yield. Looks at Eastman Kodak. Had a great yield until recently. Yield only stays high if the company can continue to earn excess profits and pay them out.

Now EK cut their dividend to channel profits into digital photography, to make up for the decline of traditional photo film. So again, that YIELD was not CONSTANT.

You cannot look at a yield or PE today. And assume that it will continue to stay the same in the future. You have to look at the industry and profits in that industry and predict whether they will stay the same, grow, or decline.

If they are a cyclical industry, and many industries are cyclical, you often don't want to buy when the industry has had 3-4 years of record earnings. This may indicate a peak.

[squiffy]

Also there are certain industries that traditionally have lower than average PEs. Possibly because of their highly cyclical natures and perhaps because of very large capital expenditures and relatively low profit margins.

Possibly in this group are builders and auto companies, both of which are interest-rate sensitive to a large extent.

[AceHigh]

[ QUOTE ]
As a matter of fact, it would be smarter to short builders and mortgage lenders.


[/ QUOTE ]

I don't know about mortgage lenders but I wouldn't short home builders. I follow Toll Brothers, (TOL) closely and they have a record number of orders through 2005. So I don't think we will be seeing the Homebuilders come crashing down for a few years at least. Changes to laws and zoning really punish the old small time home builders and reward the larger firms.