Wednesday, August 8, 2007 2 comments ++[ CLICK TO COMMENT ]++

Purchase: DFC; Crisis at Delta Financial Corporation (DFC)?

I had been tracking Delta Financial Corporation (DFC) for a few months now. Delta dropped around 40% today after delaying their earnings call. The way Delta Financial handled the situation seems bizarre. They didn't even release a formal press release, and instead just posted a brief note saying they are delaying the earnings call just before the earnings announcement before market open. The following analysts comments pretty much captures the shareholder's thoughts I imagine:

Richard Eckert, who follows the mortgage-lending industry for Roth Capital Partners in Los Angeles, said the postponement came as a major surprise."I'm wondering what they know today that they didn't know yesterday or two days ago," Eckert said. "If they were planning to postpone the earnings report, why didn't they issue a press release? Why wait until this morning? Why leave it for people to find out by themselves?"

(source: Delta Financial, LI subprime lender, puts off earnings report, stock hammered By James Bernstein, 5:57 PM EDT, August 8, 2007,

The unprofessional nature of the situation can mean that there is fraud or something sinister; or something happened between yesterday and today. I like to think it is the latter. It is quite possible that Delta got margin calls on their warehouse loans this morning (or late yesterday). Some companies have been unable to meet these margin calls and have had to declare bankruptcy. Hopefully that isn't the case with Delta. One thing to note is that, like most of the small-cap and mid-cap lenders, liquidity is very low at Delta (there is hardly any cash on the books).

In any case, I decided to take a very small speculative position in DFC @ $5.50. The stock is already down 20% but it can move in either direction quickly. This is the type of position that can go to zero or go up 100% very quickly. It's totally dependent on news and credit market conditions. I am wondering whether I should add to the position. It's definitely very risky but has the market oversold the danger?

Why Pick Delta Financial?

I am bearish on real estate but I always felt that some of the beaten-down stocks are worth investigating. For instance, I think one might be able to pick up Owen's Corning (OC; OCWAZ.PK) or USG (USG) at attractive prices when housing slows down. The companies that are most interesting, while also being one of the riskiest areas in all of investing right now, are the mortgage lenders. Almost 50 lenders, not all of them large or publicly listed, have either gone bankrupt or sold themselves off during a crisis. On top of all the credit tightening in CDOs and ABSes, the lenders have complicated financials that are difficult to understand (at least for me). One can never tell what the booked profit of these lenders really mean, or what the true value of assets on their balance sheet. But all these issues also mean big profit potential. It is often profitable to pick the last man standing. I'm thinking that Delta can gain market share while other lenders fall.

Here are some reasons I like DFC...

Most of DFC's loans (unless management changed their strategy recently) have been mostly in the fixed-interest mortage area. These are safer than subprime and defaults shouldn't be that bad. DFC can still run into problems if the credit market locks up (as it seems to have lately) but the problems will be much easier than competitors who are all over the sub-prime market.

DFC has also avoided California and Florida for the most part. These two have some of the most overvalued real estate in USA so I would want to avoid these states for the time being.

DFC, although small, has been in the business for many years so it isn't quite one of those fly-by-the-night mortgage lenders. Management seems competent and owns a big chunk of the company.

Lastly, Mohnish Pabri, a value investor with a good albeit short track record, has a big stake. This in and of itself means nothing but it does give some confidence. Monish has written up some articles (let me know if you want me to link to those articles).

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2 Response to Purchase: DFC; Crisis at Delta Financial Corporation (DFC)?

August 13, 2007 at 7:59 PM

has Monish done any write-ups specifically on DFC? I've read a lot of what he's written or interviewed on, but off the top of my head I can't recall anything specifically on DFC.

August 14, 2007 at 1:31 PM

I don't have anything directly from him. Check the DFC message board at to see if anyone knows anything concrete (people post stuff supposedly from Mohnish but I have no idea how reliable that stuff is)...

If I remember, I have seen him talk about DFC on some TV interview. I don't recall where or when. But it wasn't anything detailed.

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