The fallout from last month's subprime headlines did not have any impact on players not involved directly with the mortgage business. In fact, while the stocks of all mortgage lenders dropped off a cliff, companies that have exposure to the mortgage sector, but that don't directly participate in the lending process have kept their valuation as if nothing happened. Two such companies are Bankrate (RATE) and Choicepoint (CPS).

While I have mentioned RATE in a negative light in the recent past, I just want to add to my original post that I believe Bankrate's earnings per share for the first quarter will come in closer to the lower end of analyst estimates - somewhere between 25 and 29 cents per share. The stock will be in the 20's before year end.

Choicepoint (CPS), in a nutshell, is a data and analytic services provider. The only time an average investor would have heard about them was when a few million identities were stolen from their possession, resulting in some heavy fines imposed upon them. Since that incident last year when the stock dropped to almost $30, it has recovered gradually to a more respectable $38, albeit a far cry from its 52-week high of over $45. It occured to me recently that no one has really talked about how the mortgage business might impact Choicepoint. I am of the opinion that Choicepoint was very heavily levered towards subprime. In fact, I believe over 75% of their business in the financial services sector (as of the end of last year) was biased towards the subprime market, including credit card companies, banks and mortgage lenders. Recently the company has sought to diversify its financial services operations, but this won't show up in their earnings until later this year and possibly in 2008. On April 24th, CPS announces earnings and I am convinced that they will fall short of expectations and/or the guidance will be weak. I recommend shorting the stock ahead of earnings.

One company that has been oversold as a result of the knee-jerk reaction to the subprime headlines is Countrywide (CFC). Countrywide is to mortgages what Starbucks is to coffee, Toyota is to automobiles and Kobe Bryant is to the Lakers. No matter what happens, if there is any one company that will survive this mortgage fallout, it will be Countrywide. This is a powerful $20 billion jugernaut that has been put in the same boat as the likes of New Century, Ameriquest and Fremont. Here is why Countrywide is positioned to actually benefit from all the mortgage hullaballoo:

• Over 90% of Countrywide's business is prime and although I am the first to admit, as I did in my post last month, that this problem is not subprime specific; that it involves loans across the entire credit spectrum subprime lenders and subprime consumers certainly have more exposure to foreclosures and delinquencies.
• While competition falls like a house of cards, Countrywide stands to gain market share as one of the few players that will be left standing. In fact, Countrywide's marketing costs (cost per funded loan) are down significantly since hitting their highs last year. This is because competition, at least whatever's left of it, is cutting down on their marketing spend, and Countrywide can leverage is brand and reputation to attract customers at a lower cost. They are the only large lender still hitting consumer mailboxes, email accounts and websites.
• Countrywide Financial, while known for its mortgage business, has a bank behind it. This allows the company to hedge risk through other means.
• Although Countrywide sells its subprime loans similar to what New Century did, they service prime loans. In fact, they buy prime loans from other lenders and service those as well. In a rising rate market, this brings in higher margins on the loans being serviced.
• Lastly, the stock is one of Bill Miller's key holdings for his Legg Mason Value Trust fund.

Countrywide's stock has dropped more than 25% since the subprime headlines broke out and the stock trades less than 7 times earnings. All technical indicators are telling me that the stock has bottomed and I strongly believe that sooner or later, this stock will find itself soaring once again.

Finally, I want to mention once again that I believe we are headed towards a recession. Consumers are tapped out, corporate spending is slowing, energy prices are rising and home values are dropping. Jobless claims are increasing and both the manufacturing and services numbers are indicating a weaker economy. This is a cycle that every economy must go through. If the fed cuts rates again, they are simply prolonging the agony of recession, which I believe is a healthy necessity for any economy.

-- Faisal Laljee

Full Disclosure: I am short RATE and long CFC, but my positions can change anytime without notice.