Beaten down shares of Newport Beach-based Downey Financial Corp. rose 75% on Thursday, but not necessarily on the expectation that things could be getting better for the savings and loan operator.
Short sellers, who sell borrowed shares with the expectation they’ll be able to buy them back at a lower price, drove much of the surge as they bought shares to cover their bets.
Downey also likely saw some gain on a strong day in general for financial stocks after better than expected earnings from JP Morgan Chase Co. inspired buyers.
Washington Mutual Inc., the nation’s largest thrift, saw its shares close up 10% on Thursday.
Downey’s shares are prone to big swings these days as they now trade for about $1.65 after a 90% decline since its 2006 peak.
The company has a market value of about $100 million.
Some think the stock has further to fall. Last month, Downey’s stock was among the New York Stock Exchange’s most heavily betted against by short sellers.
Friday’s government takeover of Pasadena-based IndyMac Bancorp Inc., which has its mortgage operations in Irvine, has brought added focus to Downey’s financial health, as many analysts look for more victims in the lending crisis.
Earlier this week, Downey said that its primary business, Downey Savings and Loan Association, was given a capital boost of $62 million in the second quarter.
Downey Financial put $50 million in, while real estate subsidiary DSL Service Co. added $12 million, the company said.
The injection of money brought Downey’s core capital ratio,a measure used by regulators to gauge financial health,to 7.5%, according to the company.
That’s down from 8.43% in March, according to the Federal Deposit Insurance Corp.
Regulators usually consider ratios of at least 5% to be adequate, but the higher the better.
