weiwentg (98.31)

Retracting my bet on Capitalsource

April 19, 2008 – Comments (1) | RELATED TICKERS: CSE

I once had picked Capitalsource (CSE) to outperform. I now retract that bet.

 In this market, Capitalsource's access to capital is going to be sharply limited. Now, that may or may not be fair. Capitalsource has historically had strong underwriting, and their credit losses had not spiked as of their last quarterly report, despite a weakening economy. However, they also did not earn enough to cover their dividend. EPS was $0.50 per share per the last two quarters, and the dividend is $0.60 per quarter.

additionally, their dividend reinvestment program, which I once used, is going to keep diluting them. in this market, with the stock yielding near 20%, each new share they issue costs them a lot. they will have a hard time loaning that new cash out to cover the hurdle. and issuing shares is a significant source of capital for them.

so much for Capitalsource. I lost a small chunk of real money on this one, plus a number of CAPS points. I'm not going to pick this to underperform, but buying the stock now would be a bit speculative. They have a strong team, and they seem to be arranging to acquire another bank, but this is still too risky for me.