Serious potential in the sub-prime mess

By Bill Capece
Collegian Reporter
February 6, 2008

Fremont General Corporation, a financial services holding company represents one of many undervalued stocks in today's market. Compared to the many victims of the current sub-prime mortgage crisis, FMT has the best chance of recovery. FMT’s subsidiaries own 22 banks throughout California that are engaged in a variety of commercial and residential real estate lending nationwide. With top institutional holders such as Barclays Global Investors, Vanguard Group, Bank of America Corp., and Merrill Lynch and Company, FMT has backing from some of the industry's most powerful corporations.

With respect to financial statements, FMT has weathered the storm better than most peers. In the most recent quarter, they saw a jump in EPS from .16 in the second quarter to .42 in the third quarter, while the third quarter last year was .40 per share. Documentation with the SEC shows company insiders also have received about 4 million shares in award of stock options. Generally when companies award stock options the price per share is relatively low compared to where they believe it to be headed.

A shortcoming of this company for the future is the SEC investigation into possible improper pricing of mortgage securities. If Fremont is found guilty, it may face charges that could escalate into the millions in lawsuits and fines. Also, in April 2007 it changed registered public accounting firms, which could indicate a disagreement of opinions on financial statements. Finally, Fremont is changing its principal executive office from Santa Monica to Brea which adds unnecessary expenses.

Some key statistics include: FMT is currently trading between $3 and $3.50 a share with 80 million shares outstanding. The 52- week high is $14.57 per share while the 52-week low was just recently hit at $1.75. P/Sales is currently 0.8x while earnings before taxes is $53.9 million.

Overall, FMT is a top pick for the long term investor. Standard & Poor's rating services affirmed that Fremont is stable because they have halted the creation of sub-prime mortgages but will still service those it currently holds until the portfolio is sold or runs out. Holding these sub-prime mortgages obligations is a testament to the integrity of FMT. If only one small cap sub-prime banking company stays afloat throughout this volatile market, this will be it.

capecew1@lasalle.edu