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Lutts Picks FTI Consulting to Benefit from Mortgage Fiasco on

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Benefiting from the Subprime Mortgage Fiasco

Timothy W. Lutts, Chief investment Strategist and Editor of Cabot Stock of the Month Report

Ideally, you want to invest in industries where the dominant factors are positive and where booming demand for products or services means revenue growth is rapid and profit margins are high. Trouble is, in the current market climate, the best growth stocks, which have enjoyed great advances earlier this year, are in retreat. Buying them is a high-risk proposition.

But there is one exception, and it’s interesting enough to discuss here.

It’s FTI Consulting (NYSE: FCN), and it excels in helping businesses pick up the pieces after they’ve been hit by devastating events.

Originally, the company’s name was Forensic Technology Inc., which gave a clear indication of the company’s expertise, and to tell the truth, I liked that name better. But the company has grown its sphere of expertise over the years, and the old name was rather limiting. So the name has been reduced to initials, which, of course, don’t match its ticker symbol.

In any event, FTI today provides a wide variety of expert services to assist companies with litigation, corporate finance, restructuring, media relations, and mergers and acquisitions.

Historically, the company has been an important player in a number of high-profile corporate events.

For example, it was instrumental in the AT&T/BellSouth merger, presenting its findings to the Department of Justice, Federal Communications Commission, and a variety of state regulatory commissions. Its forensic accountants and forensic computer consultants analyzed Refco’s money trails to tell the board where the money went. It used over 40 employees over an eight-month period to analyze and evaluate over 150 million Freddie Mac documents. It assisted TYCO in responding to the SEC’s request for documents. And it was instrumental in the restructuring of American Home Mortgage, Calpine, Dana, Delphi, Northwest Airlines, Tower Automotive, and Winn Dixie.

Today, FTI has clients in a wide variety of industries, including automotive, chemical, communications, construction, energy, financial services, healthcare, insurance, pharmaceutical, real estate, and retail.

And business is booming. In the third quarter, revenues grew +56% to $253 million, while earnings jumped +46% to $0.60 per share. The profit margin for the quarter was 10.8%. Following the report, analysts adjusted their estimates of future earnings upward.

And with good reason! All you’ve got to do is look at all the failures in the mortgage industry and the related credit-dependent industries to conclude there’s a lot of forensic work to be done and that FTI will be one of the major beneficiaries of this trend.

Since the third-quarter report was issued, the stock has climbed from $53 per share to a high of around $61, totally ignoring the broader markets’ weakness. Since then it has pulled back just slightly, trading around $57 per share.

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