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Dolan stock dips, then bounces, following foreclosure-snag headlines

“The Street” can’t make up its mind about Dolan Co. As the negative news about the financial industry’s foreclosure procedures grew, traders and investors punished Dolan stock.

“The Street” can’t make up its mind about Dolan Co. (NYSE:DM).

The Minneapolis-based business services and information provider derives more than half of its revenue from helping law firms process foreclosures, bankruptcies, evictions and litigation related to residential mortgage defaults.  As home foreclosures grew and the company said its pipeline on foreclosure-related revenue extended into 2011, the stock traded as high as $13.30 in May.

But then stories began to surface alleging that workers processing files for several banks signed foreclosure documents without personally verifying information as required. Last week, headlines reported that as many as 40 state attorneys general are planning to investigate foreclosure processing. Finally, Bank of American announced a moratorium on foreclosures, joining four other loan servicers that have slowed or halted proceedings across several states. 

As the negative news grew, traders and investors punished Dolan stock.

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Last Tuesday, the shares fell $1.24, or 11.4 percent, to $9.65 on 1.3 million shares traded, nearly six times its average volume. The stock finished the week at $9.98. But after a weekend of contemplation and remorse — aka second thoughts — the stock gained Monday, closing up $0.32, or 3.2 percent, at $10.30 on relatively light volume of 140,000 shares.

Efforts by the Obama administration and states to slow the rate of foreclosures has brought sluggish activity and extended the pipeline of future business, estimated to be a $1.6 billion market. “There remains a large backlog of future default files still to be processed,” the company told investors last quarter.

 Robert Evans, director of investor relations at Dolan and a former analyst who used to follow the company at Craig-Hallum, said announcements of foreclosure delays have not affected Dolan’s business. “We are involved in the foreclosure start or referral process,” he said. “When they’re talking about short-term moratoriums on foreclose sales, that’s the back end. Our business is at the front end. To this point, our business is operating as it always has.”

George Sutton, Evans’ replacement at Craig-Hallum, remains positive on the stock, with a “buy” rating and a $16 price target. “Bank of America took a process that they don’t believe has any issues, and they’re just double checking. So it could be as short as a one-week delay. Our message for investors has consistently been to buy in the face of this headline and political risk, because we believe it is a temporary situation and we think Dolan will continue to do well in spite of it.”

Dolan’s NDeX business services unit provides software to help law firms and attorneys process large numbers of residential foreclosure-related legal filings. Mortgage foreclosure processing provided $82 million, or 52.5 percent of revenue, for the first six months of the year.

In its second-quarter release, the company issued a forecast for full-year revenue between $307 million and $310 million, net income of $34 million to $36 million, or $1.11 to $1.18 per diluted share. But the company also cautioned investors its forecast “assumes that there will be no material effect on results of operations from current or future foreclosure-related government legislation or programs, or from investor- or lender-based programs.”

Evans said the company will likely announce its Q3 earnings, for the period ending Sept. 30, sometime in the first week of November.