New Century Financial Corporation (NYSE:NEW) shares moved down $8.26, or 56.38%, to $6.39 today after several analysts agreed that the nation's largest subprime mortgage lender would likely face liquidation or bankruptcy. The troubled company had already been experiencing a large increase in subprime defaults when it announced late Friday in a 12b-25 filing that it is technically in default with several lenders and that federal regulators have begun an investigation. While the company said it received waivers from six out of the eleven lenders, deals remain uncertain with others. Meanwhile, the company disclosed that the U.S. Attorney's Office was conducting a federal criminal inquiry into trading of NEW securities as well as accounting errors. Finally, the company revealed that it would be unable to file its 10-K annual report by the March 1, 2007 deadline because it needed to correct errors that it discovered relating to the financial reporting of loan repurchase losses.

Many analysts now believe that the company will likely face liquidation or bankruptcy. Consequently, investors must now attempt to evaluate how much they would receive in the event of a liquidation or bankruptcy. It is important to remember that common stock shareholders are at the end of the bankruptcy line; all lenders and preferred stock shareholders must be paid off in full before anything is distributed to common stock shareholders. Moreover, the company's primary assets are mortgage securities, which are notoriously difficult to value - especially with no guidance from the company. Despite this difficulty, some analysts have created an estimate. Bear Stearns analysts believe that the liquidation value should be close to $8 to $9 per share, down from their previous forecast of $10 to $11 per share.

Many traders are also watchful of the high short interest in the stock. When someone short sells a stock, they are essentially borrowing shares that they must buyback at a later time. Therefore, when there is a high short interest and the stock jumps up in value (generating a loss for those short selling) some are tempted to buyback their shares. This buyback adds even more steam to the bullish rally, potentially causing even more short sellers to cut their losses and buyback shares. This is known as a "short squeeze" among traders, and some consider it a possibility in this scenario.

Regardless, this is certainly a stock to watch. There are clearly problems with the company that carry a lot of risk; however, there may turn out to be opportunities to buy based on liquidation value and/or a potential short squeeze. While there isn't enough information to do anything but speculate now, there will be much more information available when the company is able to file their 10-K annual report with the SEC later next month.

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