Countrywide Falls to Book Value

Dave Neubert is buying shares in Countrywide, and it seems he's mainly looking at one crucial indicator: the price-to-book ratio.

Countrywide Financial has a book value around $25.00. Last week I put a Good-Till-Canceled (GTC) limit order in at $25.96 (just above book value), when the stock was still trading above $30... I added to my position in Countrywide at $25.96 today. The entry price for the rest of my position is $34.50.
The CEO has made public comments about the details of CFC's liquidity position. It seems the liquidity safeguards they put in place will hurt the company's earnings but they will not go into liquidation. In that case, it seems to me that book values are a very safe place to buy the stock.

If you like this logic, pile in: Countrywide is now trading at $25.28. And in general I'm sympathetic to this kind of logic: financial insitutions rarely trade at or below book value for long, especially, as is the case with Countrywide, if they're very liquid.

But the reason that Countrywide has been falling like a rock of late has nothing to do with liquidity: it's all about solvency. Book value is a lagging indicator, and is highly contingent on the value of Countrywide's assets. Clearly, the markets don't have a huge amount of faith that those assets are worth what Countrywide thinks that they're worth. And given that Countrywide already has $124 billion in debt, it's not completely reassuring that it has the ability to increase that number by another $50 billion or so.

But if you have some spare risk capital lying around, buying Countrywide at these levels could be an interesting punt. After all, with so many mortgage lenders going out of business, Countrywide is increasing its market share every day just by staying alive.