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Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2020 contest. Louis Navellier’s pick for the contest is PennyMac Financial Services (NYSE:PFSI).
It might not be a household name, but PennyMac Financial Services (NYSE:PFSI) is certainly getting the attention of investors these days.
PFSI is one of the top four mortgage lenders and servicers in the United States. And it’s the No. 1 issuer of government loans like Federal Housing Administration and Veterans Administration mortgage products. This is an especially good sector — and one set to shine — since these loans are underwritten by the U.S. government. Why does this matter? It takes some of the risk off the originator.
Perhaps the reason you have not heard of this company is that it’s relatively new to the market, opening its doors in the teeth of the financial crisis in 2008 and going public in 2013. Some of the major players have been around for decades, if they survived the devastation of the financial crisis.
Before PFSI launched its IPO, it spun off a sister company, PennyMac Mortgage Investment Trust (NYSE:PMT), which is structured as a real estate investment trust (REIT). This illustrates the savvy management at PFSI.
Sisters PFSI and PMT Work Perfectly Together
This arrangement allows PFSI to originate the loans and then sell them PMT to service. As a REIT, PMT offers a big dividend, currently around 10%. PFSI can focus on the growth side of the business without having to manage the risk on the back end.
It is a testament to this hedging strategy that PMT is down 25% in the past year due to pandemic default risks while PFSI is up 95% over the same time period. Interest rates are low, so people are buying homes at a strong clip.
PFSI is the growth component of the two companies and in this market, it’s going gangbusters. Just a couple weeks ago, Wedbush raised it price target on the stock from $60 to $70. It’s trading just below $60 now, but the fact is, even after its big run, it’s only trading at a price-earnings ratio of 4.8 times.
But you need to bear in mind that PFSI, for all its top-notch performance, isn’t a huge company. Even after its big run this past year, the stock has a market capitalization of just $4.3 billion. Remember, it’s fundamentally a growth engine, generating new sales and then selling off assets to its REIT and other financial institutions.
This is a very interesting model done on this scale. Bigger financial institutions would simply move a mortgage from the origination department over to the servicing division that would then allow the trading division to slice and dice the mortgages into derivatives.
Best Stocks: PFSI Stock Is an Election-Proof Buy
PFSI is operating a different model. And it’s working.
It’s no surprise that PFSI started its current move last year when it was clear interest rates were going to be low for the long term and the economy was expanding. The stock took a hit in March and dropped to $16 at the depths of shutdown.
But it has bounced back significantly since then, and given the outlook for rates moving forward, all systems are go. Also, the election is not an issue for PFSI. If the Republicans stay in power, there will likely be a new stimulus package. And if the Democrats take control, it will likely be a bigger stimulus package.
Both will be huge cash infusions to help people stay afloat and help businesses continue to operate. And all that will be tied up with a low-interest-rate bow.
On the date of publication, Louis Navellier had a long positions in PFSI. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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