I sold my equity holdings in CapitalSource today (I also covered my short call options recently, but I continue to hold some long call options for 2010). This is not because of any imminent problems I see with CSE, but simply because I think I’m going to see some better opportunities to invest in the next couple days and I want to raise a bit more cash. And if those opportunities don’t arise, well, having cash at the moment doesn’t seem all bad, either.
CapitalSource is a mid-market lender that is in the process of converting from a Mortgage REIT to a commercial bank, so although management has a history of good lending practices in their niche markets, there is some significant uncertainty about exactly how things will work out in the coming year. The recent selloff was largely a result of their dividend cut, which was both telegraphed by the company and indicative of the potential business they believe they can invest in in the near term. I do think CapitalSource has a good chance to be a successful small commercial bank, and they do have a history of good secured lending to midsize businesses, but that doesn’t mean the stock is going anywhere in the next six months. I’ll keep an eye on this one, and I may re-enter a position at some point, but for now I am exposed to CSE only with LEAP call options.