Shorting Opportunities in DRL, PNSN After MF’s Bankruptcy

Stocks of small financial firms Doral Financial Corp (NYSE: DRL) and Penson Worldwide Inc (NASDAQ: PNSN) are under pressure in a depressed market. Today’s financial press is littered with the news of broker-dealer MF Global Holdings Ltd’s (NYSE: MF) bankruptcy filing. The New York-based investment bank’s aggressive bets on European debt went awry after the ratings agencies admitted of being ahead of the curve and unnecessarily aggressive reflecting poor risk management.  The $6.3 billion bets proved to be the final nail in the coffin of the highly leveraged investment bank, but the signs were already there.

However, not everyone believed the end would be so abrupt. Reuters editor David Gaffen last week tweeted about a TV report on MF Global and called the report “bewilderingly bad, full of speculation and weird assertions”. Meanwhile, the stock tanked from $3.75 on October 24 to $1.2 yesterday while trading has been suspended today. The company was believed to be close to a deal with Interactive Brokers Group to sell its assets but the news of bankruptcy filing took precedence after a number of exchanges suspended dealings with the broker.

The domino effect can be seen on the stocks of almost all financial companies but it is prominent in the case of Doral Financial Corp (NYSE: DRL) which is down more than 6 per cent today. The stock, which has a 52-week range of $ 1.00 - $2.72, is currently trading at $1.23. Doral Financial’s similarity with MF Global is the high debt on its balance sheet which automatically raises speculation of a similar step by Doral Financial. Although it is unreasonable to assume that Doral will seek bankruptcy protection because MF Global did, that is how companies in the same space or with similar characteristics are treated. Accordingly, there is scope on the down side in Doral Financial. Till the time MF Global comes up with suitors, DRL is expected to remain under pressure.

Similarly, Penson Worldwide Inc (NASDAQ: PNSN) is another highly leveraged financial services company. The stock is currently down 2.5 per cent to $1.22 against the 52-week range of $ 1.15 - $7.41. The stock has been coming down in the last couple of weeks and is likely to test its 52-week low before going up. PNSN can also be played on the short side till the fate of MF Global becomes clear.