Description
BOTTOM LINE
ECR is a classic cigar butt. Originally written up by bill67 on 3/8/06, but now with a clearly defined catalyst. It is a 33+% return opportunity that will go to a 100+% return opportunity in a couple months.
BACKGROUND
The subprime mortgage finance industry is deeply cyclical with almost no barriers to entry. The industry imploded after the 1998 Russian debt default/LTCM debacle, creating liquidity crises for all and bankruptcy for many. The easy credit conditions and strong housing market of the early 2000s led to the re-emergence of the industry. The subprime specialists that managed to survive the crash soared, and many new players IPOed. ECR was one of last of that crop of stinkers and arguably the worst.
Like the divorcee whose infuation trumped experience, investor love soon turned to regret. As you are all aware, the housing sector has stumbled, fat subprime spreads have collapsed, and losses are piling up on sloppily-underwritten loans. The only thing that ECR shareholders have to look forward to this year is a tax loss.
THE CATALYST
Their loss is your potential gain. ECR is currently trading at about $1.20. In 1Q07, ECR will close on the sale of its origination platform to Bear Stearns. Shortly thereafter, you will get a $.80 distribution. The company is worth at least $1.60. So, you should get at least a 33% return for your troubles if you buy the stock now. After the distribution, your return potential goes to at least 100%.
The $1.60 floor valuation appears solid. Tangible book value is slightly north of $2, and that is after multiple rounds of impairments. Management has publicly affirmed the $1.60 valuation three times in press releases between October 10 and December 5. They have no incentive to lie; given the tremendously poor performance to date, any puffery at this late stage would be an invitation for a lawsuit. And with their still substantial holdings, that would be the last thing insiders need. Conversations with the CFO suggests there might be some slight upside to the $1.60 figure, which he considers conservative.
This writeup is short because I did not put in extraneous information that is not central to the investment thesis, which is obviously very simple. There is also some useful background in bill67's original thread, which I would encourage you to read if you have any interest. I will however do my best to answer any questions.
RISKS
Bear Stearns deal falls through
ECR mortgages season significantly worse than they already have
Catalyst
Closing of Bear Stearns deal in 1Q07 resulting in $.80 dividend
Final liquidation of remainder of company