Shorting the Lenders
There has been alot of talk about shorting the lenders lately, so I thought I would devote a day to discussing this. Accredited Home Lenders is displayed over on the left. As you can see it has dropped from a high of 60.13 to a last trade of 24.50. It is clearly in a downtrend, yet if we look at the last 12 months earnings, we see a nice uptrend. Also, another filter I like to look at is debt. Their debt ratios are actually dropping.
Many people are expecting both the EPS to deteriorate, as well as the debt to increase, due to the difficult period that lenders in general are in.
However, as I have told people over the last 6 months to a year with the homebuilders, the balance sheets of most of these companies have very attractive ratios still. This does not make them prime candidates for shorting. I want deteriorating debt ratios, and declining earnings for stocks I am shorting, and the reverse for stock buy candidates. Further, this is a stock that has already dropped 60%, so although there may be more downside, the fat of the move is already over.
For those that cannot help themselves, and are dead convinced that the worst is just beginning, I suggest just waiting for 3 to 7 day reactions upward against the downtrends to taks short positions, or buy puts. Then hope the downtrend resumes. These little retracements visually look like flags, so we call them bear flags. I would start this process by looking at stocks that have increasing debt and declining 12 month earnings ( not just one quarter ). This will itleast line up the fundamentals with the "story."
For Sam, NFI has fallen way more than these others from 70.32 to a last of 15.96, too late there. NEW is the same story. AHM looks better as the 12 month EPS has declined and debt ratios have risen, and the stock has only dropped about 25% off the high. However, it is not in a downtrend yet. I would wait for a break, and short the first retracement of that one.