Top investor hangs tough with Countrywide

Ron Muhlenkamp is a longtime shareholder of the No. 1 lender - and he has no plans to bail out now.

By Penelope Wang, Money Magazine senior writerOctober 24 2007: 10:41 AM EDT

NEW YORK (Money Magazine) -- Veteran stock picker Ron Muhlenkamp first bought Countrywide shares in 2002 when they were getting crushed - and he's not ready to sell now.

Muhlenkamp, who runs the $1.9 billion fund that carries his name, first bought into the mortgage lender when the stock was languishing at $11 a share amid a bear market.

Ron Muhlenkamp

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The stock eventually reached a peak of $45 a share earlier this year before plunging to a recent $15.

Muhlenkamp sold a portion of his Countrywide (Charts, Fortune 500) stake in January at $40, but he still had some 4% of the fund invested in the stock in June, when it began its plunge. He currently holds a 2.5% stake.

"I should have sold a lot more," says Muhlenkamp, whose fund (MUHLX (Charts) has lagged badly over the past three- and five-year periods.

Still Muhlenkamp's contrarian bets have led to a superior 9.8% annualized return over the past 10 years, putting the fund in the top 10% of the large-value category.

And Muhlenkamp prizes Countrywide's mortgage underwriting and servicing operations, which he views as valuable assets worth far more than the current stock price.

Says Muhlenkamp, "They have an organization that other firms simply don't have." And Countrywide's expansion into banking is another plus.

"We figure that three to five years from now, there will still be a mortgage and housing industry," Muhlenkamp says. "And Countrywide will still be one of the survivors - many of its competitors are going out of business."

As for the SEC investigation into the stock sales by the controversial CEO Angelo Mozilo, Muhlenkamp is unconcerned.

"We knew he was selling" says Muhlenkamp. "Mozilo built a great business, so you would expect him to reap financial rewards. That's fine as long he takes the shareholders along with him. And he did - he made us a lot of money. "

Still, Muhlenkamp isn't ruling out further trouble ahead for Countrywide, including a rising foreclosure rate and hits to earnings. "We expect that the fallout in the housing market could go on for a couple more years," he says. "But we think the worst-case scenario is that Countrywide will get bought out cheaply."

And in true contrarian fashion, Muhlenkamp says he will look at further dips in Countrywide's share price as possible buying opportunities. "I expect there will be some tax-loss selling before the end of the year," he says. "And when everyone else is selling, that's the best time to buy." 

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