Novastar stock goes supernova

In this Dec. 19 post, "Betting against subprime mortgage lenders," Inman Blog pointed readers to management consultant and Babson College professor Peter Cohan's thoughts on shorting the stocks of nonconforming lenders.

At the time, Cohan noted the percentage of "short interest" in six publicly traded subprime lenders, with the bets stacked highest against NovaStar Financial Inc. Wall Street investors held short positions on a remarkable 32.1 percent of NovaStar's outstanding shares, indicating widespread doubts about analysts' predictions that the lender's earnings would grow by 8 percent in 2007. Cohan agreed with the short sellers that NovaStar looked like the most vulnerable of the bunch.

NovaStar proved the doubters right this week when it reported a $14.4 million fourth quarter loss Tuesday. The company said it has been forced to repurchase more bad loans it originated in 2006 than it expected to, as the rate of early payment defaults is up.

NovaStar, which was trading above $50 three years ago, closed at $17.57 Tuesday, minutes before fourth quarter and 2006 results were released. It opened at $11.02 this morning and finished the day at $10.10 -- down from $29 when Cohan made his observations on AOL Blogging Stocks.

Cohan wasted no time in weighing in again this morning, noting that short sellers who took his advice in December stand to earn a 62 percent return on their money if they buy stock to cover their short positions now.

Over on MarketWatch, commentator Herb Greenberg has the story of the war of words on Internet message boards between short sellers and NovaStar's faithful (Greenberg says he became "Public Enemy No. 1" of the company's boosters for his criticism).

Somewhat lost in today's rush for the exits: NovaStar added 19 new offices in 2006 and boosted loan originations for the year by 21 percent to $11.2 billion, while reducing the cost of loan production by 34 basis points to 2.03 percent.
--Matt Carter, Inman News

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