Navellier: A Countrywide Buy

05/30/2003 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

"Dividend discount models now indicate that the stock market is 48% undervalued relative to Treasury bonds," says Louis Navellier. "And when considering that bonds will be taxed at 35% and dividends are now going to be taxed at 15%,  the stock market is now at least 60% - 65% undervalued versus bonds. The market will be very, very strong here for some time. I advise everybody to jump on board and be diversified and enjoy the ride. This is a great time to be an investor. There is a lot of upside potential and not much downside risk."

"There is only one stock that I could find to add to the Buy List this month that was characterized by profit margin expansion, strong earnings growth, and very strong internal cash flow. Our New Buy is Countrywide Financial (CFC NYSE), which is rated a moderately aggressive buy below $75. Financial stocks like Countrywide have been very strong performers recently. As intermediate and long-term interest rates have fallen recently on the Federal Reserve Board's deflationary concerns, many financial companies' operating margins typically expand as their cost of funds fall. Countrywide is a huge mortgage and consumer lender. Their mortgage business continues to be bolstered by the recent pullback in long-term interest rates."

"Countrywide also has a substantial sub-prime lending division that lends money to consumers with a less than glorious credit history. When the US economy falters, Wall Street tends to shun sub-prime lenders such as Countrywide because it's worried about rising consumer default rates.However, when the US economy is poised to expand, consumer default rates plunge and sub-prime lenders often post spectacular earnings results. Now that consumer confidence is soaring and the US economy is poised to rebound sharply, Countrywide should continue to post record profits in the upcoming quarters. There is another aspect associated with Countrywide Financial that I should tell you about. Sub-prime lenders are hot, especially after Hong Kong Shanghai Bank bought Household Financial last year at a huge premium."

"Every major bank in the US also has their own sub-prime divisions that lend money at higher-than-normal interest rates to consumers with credit problems. These banks often 're-name' their sub-prime divisions because they often get attacked by consumer groups. The bottom line is that good sub-prime lenders with healthy operating margins, such as Countrywide, are always attractive acquisition targets for major banks and financial institutions. Countrywide simply creamed estimates for its first-quarter earnings. Analysts were expecting CFC to earn $2.08 a share, but it announced earnings of $2.44 a share. Last year's first-quarter earnings were $1.32 a share, so CFC is demonstrating tremendous earnings growth. Countrywide is expecting 2003 earnings to fall between $10 and $11, well above the Street's previous estimate."

Related Articles on