Stock Picks: CIT Up, LDK Down

Shares of beleaguered small-business lender CIT Group (CIT) soared 14% in midday trading Thursday after the company announced a plan to preserve its tax benefits and agreed to file plans with the Federal Reserve on how it will boost its capital ratios, as well as better manage its credit risk and loan losses.

CIT Group has been on the verge of bankruptcy for months. Earlier this summer, the lender asked for a federal bailout and was denied government funds, causing its shares to plunge and the company to be removed from the S&P 500 stock index.

The company said its latest plan should help it preserve potential income-tax benefits by making it more difficult for large shareholders – those with 5% or greater stakes – to trigger an ownership change under U.S. federal income tax rules. CIT said the plan "is designed to protect the company’s ability to utilize its net operating losses and other tax assets, preserving value for the benefit of all stakeholders."

Also, the Federal Reserve ordered Salt Lake City-chartered CIT to "submit to the Reserve Bank an acceptable credit risk management plan to address and correct weaknesses" in its risk rating process and to improve the accuracy of assigned credit risk ratings. CIT must file the plan within 15 days and submit a more comprehensive business plan within 75 days.

Analysts said neither development was surprising or would have much impact on the lender's eventual and difficult restructuring.

Jim Sinegal, an analyst at Morningstar, say the stock's Thursday rise was a mystery to him. "It doesn’t make any sense to me. It seems to me the balance is far more negative than positive," he says. "CIT is saving the tax benefit but making it harder for people to take stakes in the company, which could make it harder for them to raise capital."

Sandler O'Neill analyst Michael Taiano says the Fed's dictates to CIT are simply formalizing an inevitable step."It's clear that they're going to drop below the capital ratios they had promised to maintain," he says. "It's not surprising that the Fed, who's now the primary regulator, dictated more specific deadlines for a restructuring plan."

Sinegal says small investors should steer clear of the stock, which could be wiped out if CIT has to file for bankruptcy protection. The boost in the company's stock price, he says, is not based on fundamentals. "So much depends now on how they eventually restructure, and I think people are as speculating on that."

Bottom Line: Sell
Unless your risk tolerance is much higher than the typical individual investor, pocket Thursday's gains and get far away from this speculative play.

The sun wasn't shining on LDK Solar (LDK) Thursday after the Chinese solar energy equipment maker reported a large loss on inventory write-downs during its fiscal second quarter.

American depositary shares of LDK plunged 14.5% in midday trading after the company reported a loss of $2.03 a share -- a dramatic plunge from the earnings of 95 cents a share it reported a year ago. Analysts, on average, expected a loss of 91 cents a share. The company posted revenue of $228 million, down 19% from the previous quarter but in line with Wall Street estimates.

Chief Financial Officer Jack Lai said in a Wednesday conference call that an inventory write-down of $175.8 million and losses stemming from price declines for polysilicon solar wafers weighed on the company's results. Gross margins for the second quarter were negative 90%, down from 1.7% in the first quarter of 2009.

"We are focused on improving our cost structure, increasing wafer sales by ramping up polysilicon production," CEO Xiaofeng Peng said. "We are encouraged by a number of recent positive developments in the solar industry and we believe the industry should see some recovery in the second half of 2009."

"Shipments are gradually improving, but falling prices continue to limit revenue and impact margins," wrote Needham & Co. analyst Edwin Mok Thursday. "As a result, LDK is taking a more prudent approach to ramp its poly plants. However, high debt/equity ratio remains an investor concern."

Sam Dubinsky, an analyst at Oppenheimer & Co., said LDK's prospects aren't as promising as competitor ReneSola (SOL), another Chinese solar wafer maker that recently maintained its earnings guidance and carries less debt.

"We believe LDK's fate relies on whether it can ramp polysilicon below current spot pricing, [which] would result in margin expansion, share gains, potential cash-flow generation; [and Chinese] government support," he wrote Thursday.

Bottom Line: Hold
Wait to see the extent of overselling on this highly-speculative stock, then weigh the risks in order to decide whether you can stomach these shares.