Why I bought more shares in First Marblehead

This is as close to a no-brainer as I've seen. Six months ago, I thought First Marblehead was cheap and now its business has improved and its price has dropped. Recently, the company raised the dividend 10% (which is on top of a 67% increase in June). Even if the dividend never goes up again, the dividend discount model suggests a value of $33 1/2 or so. A modest 10% increase for the next 5 years followed by no further increases is worth about $57 1/2 according to my model. According to the Quicken DCF model, Marblehead only needs to grow at 1.8% to justify its current price.

The only thing that has been missing for the last few months has been cash to augment my position. Thankfully, I was able to lighten up on Oracle just in time to collect a larger dividend on my shares this morning.

Update September 24:

I found another opinion of First Marblehead that echoes my feelings and assigns a range of values to the company. Even under the worst case when everything falls apart for the company, the author assigns a price per share of $42. I've found that my best investments occurred when I couldn't figure out how a company could be valued as low as the market price. For instance, when I first bought Oracle, it seemed like the market was operating under the assumption that the database business was dead. Both times I bought Canon, the market seemed to have factored in only minimal growth. If I had bought Select Comfort when I first looked into it and it was trading in single digits, that would have been the same story. In fact, the market scared me out of buying the mattress company until the price was more in line with its value.

In First Marblehead, I think the market is crazy and it thinks the same of me. One of us is right and the other will be shown wrong in the next few years. This is an ideal example of why value investing is normally contrarian investing as well.