In Cramer’s May 15 Sell Block segment, “The Newest Mortgage Offenders,” why did the Mad Money guru slam IndyMac?

IndyMac’s bad loans are skyrocketing, the company keeps diluting shareholders as shares outstanding continue to build up. And it isn’t even saying it can be profitable this year as it remains heavily exposed to the worst areas of the California market, which make up nearly 50% of its holdings.

At one time, IndyMac (IMB) made my Small Cap Watch List (Track at Marketocracy). But that was a long time ago. These days it doesn’t even make it past my initial screens.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

Shares of Large Cap Watch List (Track at Marketocracy) member IndyMac Bancorp are rising in premarket trading after the company issued a press release with the following update:

IndyMac Bank - Investor Relations - Press Release

Indymac’s exposure to subprime mortgages is small, and the Company’s credit performance statistics are reflective of prime/Alt-A mortgage lending.Indymac has been inappropriately categorized by many media sources as a subprime lender, and we wish to clarify our position as predominantly a prime/Alt-A lender with the following facts:

1. Based on the definition of subprime established by the Office of Thrift Supervision (OTS) for our regulatory filings, only 3.0 percent of Indymac’s $90 billion in mortgage loan production in 2006 was subprime.

2. Indymac’s asset-backed securitizations (ABS) classified as subprime total $6.8 billion(1) and represent only 4.4 percent of our total $156 billion portfolio of loans serviced as of December 31, 2006.

3. We do not rank among the top 25 subprime lenders in the country in any current industry survey, nor are we part of the ABX Index of the top 20 subprime issuers.

4. Subprime mortgages generally include those loans where the borrower’s FICO score is 620 or below. In contrast the averageFICO score on Indymac’s 2006 loan production was 701.

Of course, one can forgive the confusion with the shares down by a third since the beginning of the year and the company having to frequently cut its guidance, as we reported two weeks ago:

According to an Associated Press article:

In January, the company forecast 2007 earnings at about $4.15 per share. At the time Wall Street was looking for profit of more than $5 per share, but analysts have since revised their estimates and now expect, on average, profit of $4.32 per share.

IndyMac did not specify a per-share earnings target on Thursday.

But that is not quite true. The 10-15% ROE range, applied to IndyMac’s $2.0 billion in equity, implies a net income range between $200 and $300 million, or roughly $2.75 - $4.00 per share.

So be it prime, subprime or what have you, it seems fair to call this company (and its shareholders) “suffering.”

William Trent currently has a short position in put options related to Office Depot (ODP).

Large Cap Watch List (Track at Marketocracy) member IndyMac Bank (NDE - Annual Report) revised its guidance in the CEO’s letter to shareholders:

Even with these measures, 2007 will likely be a down year for our EPS, although our ROE should still be solid, in a broad range of 10 percent to 15 percent. Factored into this forecast is a continuation of tough conditions for loan originations, credit performance and in the secondary market. Our more detailed internal forecast shows that our ROEs for the early quarters of the year will be at the low end of the range above; however, during the second half of the year, if we execute on our plans as we expect, and with a little luck, our ROEs could be at or even somewhat above the high end of the range. With all of that said, if market conditions deteriorate significantly from what we are forecasting today … which is always a possibility … there could be some downside to the above ROE range.

According to an Associated Press article:

In January, the company forecast 2007 earnings at about $4.15 per share. At the time Wall Street was looking for profit of more than $5 per share, but analysts have since revised their estimates and now expect, on average, profit of $4.32 per share.

IndyMac did not specify a per-share earnings target on Thursday.

But that is not quite true. The 10-15% ROE range, applied to IndyMac’s $2.0 billion in equity, implies a net income range between $200 and $300 million, or roughly $2.75 - $4.00 per share.

A lot can change in a little more than a month.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.