Filed under: Short stories

Although short selling — the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price — goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn’t, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don’t offer any investment advice and I don’t trade on any of the posts I write.

Alesco Financial (NYSE: AFN) looks like it will have trouble coming up with the money to repay its debts. This Real Estate Investment Trust (REIT) uses borrowed money to buy into the alphabet soup of securities — such as Collateralized Debt Obligations (CDOs) and Mortgage Backed Securities (MBSs) — that could cost Wall Street up to $400 billion in write-downs. With 22% of its float sold short, many investors have already figured out that Alesco, at $3.28, is on life support. But it pays a 31 cent a share dividend, for a 9% dividend yield, which those short sellers are willing to pay because they think the stock has further to decline.

The question about whether to sell short this stock revolves around whether Alesco can pay off its $11.2 billion in debt. Here are some factors to consider:

• Debt repayment. In its most recent annual report of March 2007, Alesco said it was on the hook to repay $3.6 billion It owed in less than a year and then nothing in the intervening years and in more than five years it would owe $6.8 billion. If it has already paid off the $3.6 billion it could be OK. But its most recent quarterly report said it had $91 million in cash so if it owes more than $91 million in the next few months, it could be in trouble. And it’s already dedicated $19 million of that cash to dividends.

Continue reading Short Stories: Is Alesco Financial headed for the dumpster?

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This entry was posted on Sunday, December 30th, 2007 at 12:14 pm and is filed under Stocks Money News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.