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August 16, 2007

After the Meltdown, Which Stocks Will Bounce?

posted by MR WAVETHEORY at 8/16/2007 01:38:00 PM
There is no doubt that the market has been very volatile lately. I've been doing some research on stocks to pick up on the way down, I think broadly there are two categories of stocks that could be interesting stocks to own. First, there are the "headline risk" stocks. These are the stocks that are related to the subprime mortgage sector. I call them "headline risk" stocks because they are the ones that have been all lumped together as bad stocks because of bad news from a few really bad actors in the lending industry. You know which companies I am talking about. Companies like American Home Mortgage (NYSE AHM) and New Century Financial (NYSE NEWCQ.PK) which have gone bankrupt have given the sector a bad name. Second, there are the companies which I would call the "momentum IPO" stocks. These are companies that have recently gone public, and primarily I am talking about the solar stocks. They have low float, have had incredible runs and have gotten beaten down in the last 4 weeks.

So, let's take a look at the first category of headline risk stocks. Why do I like them? First, I believe that there have been far too few bankruptcies in the subprime lending area to justify selling all of them. Think about it for a second. If the entire sector is under distress, would you expect just a few companies to go bankrupt? Frankly, there are so few bankruptcies that I think subprime is a much healther space than most people think it is. So what if American Home and New Century went under? Aegis or Resmae? I would expect to see dozens of lenders go under if this were a major problem. But we are not. In fact, there isn't enough evidence or proof of a liquidity crunch to justify the wholesale slaughtering of subprime stocks. That's why I agree with William Poole of the Federal Reserve that the Fed doesn't need to lower rates between Fed meetings. It's okay to have a little pain in the markets, because that's what creates bargain hunting opportunities.

The Wall Street Journal wrote a good article the other day about commercial REITs that have really gotten blown apart and that's a great place to start.

There are a couple of stocks that look interesting at this point. I'll just put the list I've been looking at down and the corresponding change from the 52 week high. They are:

RAIT Financial Trust (NYSE RAS -80%) - Founding family buying shares.
CB Richard Ellis Realty Finance (NYSE CBF -72%) - Won't be making new loans. I take that as a good sign.
KKR Financial Holdings LLC (NYSE KFN -56%) - Name brand in finance. Unlikely this will fail. Plus, it's down 70% from the high.
Thornburg Mortgage (NYSE TMA -56%) - CEO says they will survive. I believe him.
Friedman Billings Ramsey Group Inc (NYSE FBR -52%) - Mortgage arm of the FBR investment bank.
JER Investors Trust (NYSE JRT -51%) - 2Q results were apparently good.
CB Richard Ellis Realty (NYSE CBG -31%) - Lots of exposure to California real estate. Kind of like th Goldman Sachs of real estate.

I am adding two more to the list:

Grubb & Ellis Co (NYSE GBE -40%) - This is a baby version of CB Richard Ellis. Much smaller, but just as hammered.
Grubb & Ellis Realty Advisors (AMEX GAV -2%) - Commercial real estate acquirers.

So, there you have the list of the headline news stocks.

Next, I looked at the momentum IPO stocks. These are stocks that have recently gone public and have run up significantly. The category that fits this definition to a T is the solar stocks. They went up because of scarcity of shares, and now they are collapsing because market makers are refusing to support the shares. You can't blame em. After all, the name of the game is to buy low and sell high - and leave your customers hanging dry!

Okay, I'm being sarcastic, but let's look at some names.

Trina Solar (NYSE TSL -42%) - Company founded by ex-Suntech Power executive. It's a momentum stock because of the hyper growth.
First Solar (NYSE FSLR -33%) - Lots of revenues. Backed by Wal-mart scion - Walmart also happens to be a big customer.

The valuation of these companies is in the stratosphere even after the minor meltdown, but could be good when things really fall apart.

I would add some stocks to the momentum IPO list, but that would spoil the fun of stock hunting for you. If you have some interesting stocks that fit the description I wrote above, please post a comment.

Happy bargain hunting!

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