GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

First Marblehead: Attractive Opportunity

June 02, 2007 | About:
10qk

Vitaliy Katsenelson

72 followers

 

In this article I made an argument that despite high uncertainty surrounding First Marblehead's (FMD) business at nine times earnings, it is a very attractive opportunity. Here are some additional points that I omitted in the article:

  • It's not your friendly subprime lender. FMD has been painted with the same subprime brush as the rest of the financial companies. However, student loans never touch its balance sheet, even for a second. They go directly from banks that originated them to securitized trust. There is also nothing subprime about these student loans. For instance, the weighted average FICO score of the latest securitization was 712 and 83% of the loans had a co-signer. FMD has no debt and has about 10% of market capitalization in cash.

    The only way we’d see recently originated loans on FMD’s balance sheet is if secularization markets shutdown. In this case FMD is required to buy originated loans from the banks. I put this risk in the same category with a risk of a nuclear meltdown. Securitization markets are the lifeblood of this financial system. FMD securitized successfully loans during the September 11th crisis.

  • A flat yield curve may not flatten FMD’s earnings. I have no idea how long the slope of the yield curve will remain flat, however, historically the yields have not stayed the same for longer than six month. I am aware that history is only there to guide us. Just because they did not stay flat for long it doesn’t mean that they won’t in the future. The flat yield curve in this environment is unlikely to be as negative to FMD as one would think as declining housing prices and increased lending standards by lenders will make it incrementally difficult for home owners to tap into (declining) home equity.

  • Cash flows are about to increase substantially as FMD will be receiving a differed (residual) component from the loans it originated years ago.
For full disclosure: I have a position in FMD

About the author:

Vitaliy Katsenelson
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.6/5 (7 votes)

Comments

vitaliy
Vitaliy - 7 years ago
Yes, Tom Brown's articles are a must read.

ccyork
Ccyork - 7 years ago


Tom Brown's hedge fund, Second Curve Capital, owns 4% of the outstanding shares of FMD. It is 2.85% of the portfolio.

-- ccyork
ccyork
Ccyork - 7 years ago
Figurenzauberer
Figurenzauberer - 6 years ago
Its such fun to read this:

" The only way we’d see recently originated loans on FMD’s balance sheet is if secularization markets shutdown. In this case FMD is required to buy originated loans from the banks. I put this risk in the same category with a risk of a nuclear meltdown."

Well - propabilities are a tricky thing, just ask LTCM's noble prize geniuses.
DaveinHackensack
DaveinHackensack - 6 years ago
I didn't catch this column when it was first written last year, but Katsenelson got hammered on this one. This should give us all a sense of humility when it comes to financial-related stocks, since even some of the best value investors have gotten caught flat-footed by them on occasion. Warren Buffett himself had a close call with Salomon Brothers in the early 1990s, and his position in Moody's is down considerably as a result of the credit crisis.

mungerite
Mungerite - 6 years ago
Jackson Hewitt didn't treat him so good either but at least he didn't erase it.
alanb9
Alanb9 premium member - 6 years ago
Figurenzauberer Wrote:

> Well - propabilities are a tricky thing, just ask

> LTCM's noble prize geniuses.

Not to bust any one's chops on a spelling, but there is more than a little difference between a noble prize and a Nobel Prize.

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Dave,

How dare you criticize a Warren Buffett holding?

Don't you know that's not allowed here?

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide