Is Flagstar the Netflix of Banking?

Flagstar's corporate team may not include Reed Hastings, but that hasn't stopped the company from losing its value. In fact, Flagstar Bancorp FBC, the parent company of the Flagstar Bank chain, might actually be worse off than Netflix NFLX. Never mind the share price; right now, Flagstar is trading in the $0.70 range, while Netflix trades at roughly $88 per share. On that alone, Netflix is the clear winner. Netflix also wins in the area of unique product offerings. Few people know that Flagstar sells consumer and commercial financial products/services in two states (Michigan and Indiana). But everyone in the country can tell you that Netflix is a leading streaming video and DVD-rental-by-mail service. Is it because people don't need Flagstar's financial services as much as they want Netflix? No. But if you need a bank, there are a zillion options to choose from – Bank of America BAC, Citibank C, Chase JPM, etc. With streaming video, you basically have Hulu and Netflix. Regardless, Flagstar was once a trading success story, soaring from $90.20 on December 2, 2002 to $264.10 on June 30, 2003. The stock held up well during the following 18 months, fluctuating as expected, but generally maintaining its impressive value. After 2004, however, the company began to face a steady stream of declines, eventually dropping to the abysmal low we see today. And, as I write this, the stock continues to tumble. With nothing but bad news for the firm, Flagstar may never be able to recover. Unfortunately, it might not have to. Earlier this year, PNC Financial Services Group PNC revealed its plans to acquire more than two dozen Flagstar Bank branches in Atlanta, Georgia. Less than a month later, Flagstar announced that it was going to divest its Indiana bank franchise. Most recently, Flagstar incurred a $14.2 million net loss in the third quarter. Can Flagstar recover? Some investors think so considering the stock's recent rally. But without any groundbreaking developments in the company's future (as far as we know, at least), it seems hard to believe that Flagstar could go the distance. One area where it has excelled is with its DocVelocity product, which is a part of Paperless Office Solutions, Inc., one of Flagstar's subsidiaries. In what could be regarded as the only positive press release to come out Flagstar in a long time, the company recently bragged that DocVelocity 3.0 won the award for “Release of the Year” by Mortgage Technology Magazine. Hmm, you mean to say you have not heard of Mortgage Technology Magazine? I guess that means these accolades aren't as prestigious as we thought. Sarcasm aside, Flagstar seems to be another corporation that soared without cause. While it may have once been a promising entity, it is no longer a firm that investors can count on. ACTION ITEMS: Bullish: If you believe in the recent rally and think that Flagstar has hope, consider the following trade:

• Flagstar used data connectivity components from DataDirect, a subsidiary of Progress Software Corp. PRGS, to improve its CRM capabilities. If Flagstar recovers, this could be a positive for Progress Software.

Bearish: For those who believe that Flagstar will continue to wither away, consider these alternatives:

• Bank of America, Citibank, Chase, Wells Fargo WFC, or U.S. Bancorp USB could provide a bit more stability than Flagstar.

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