1 Top Mortgage Finance Stock to Buy, 2 to Sell

Even though the economy is returning to normality after a year and a half of hardships, fundamentally weak mortgage finance companies, such as Rocket Companies (RKT) and PennyMac Financial (PFSI), may find it challenging to regain pre-COVID levels of growth soon. But we think Essent Group (ESNT) is well-positioned to reap the benefits of the economic recovery and the strong housing market. Read on.

COVID-19 posed a series of problems for mortgage lenders as mortgage rates fell to historic lows, and lenders were flooded with refinancing requests. Many lenders had no choice but to raise rates. And it soon became clear that without a steady flow of income, many homeowners who had lost their jobs would struggle to stay current on their mortgage payments.

Nevertheless, the housing markets had a great year despite the uncertainty as people spent heavily on new homes seeking to improve their remote lifestyles. The 30-year, 15-year, and 10-year mortgage rates have held steady for six straight days now. Furthermore, according to a CNBC report, mortgage originations to buy a home are expected to rise 9% to a record of $1.73 trillion in 2022.

Given this backdrop, we think it could be wise to bet on fundamentally strong mortgage finance company Essent Group Ltd. (ESNT). Conversely, we think Rocket Companies, Inc. (RKT) and PennyMac Financial Services, Inc. (PFSI) are not well-positioned to benefit from industry trends. So, these two stocks are best avoided now.

Stock to Buy:

Essent Group Ltd. (ESNT)

Headquartered in Hamilton, Bermuda, ESNT is a private insurance company that offers private mortgage insurance and reinsurance for mortgages secured by residential properties located in the U.S. It provides products and services that include mortgage insurance, contract underwriting, and Bermuda-based insurance and reinsurance.

On November 18, 2021, ESNT announced that its subsidiary, Essent Guaranty, Inc., had partnered with OpenClose to offer ESNT’s products and services through their Lender Assist loan origination system. Vice President of customer experience and innovation at ESNT said, “Our new integration with OpenClose creates efficiencies for our mutual customers and leverages our engine’s proprietary risk metrics and advanced analytics to offer our best MI pricing for the borrower.”

ESNT’s revenue for its fiscal third quarter, ended September 30, 2021, increased 16.6% year-over-year to $283.53 million. The company’s net income increased 64.9% year-over-year to $205.35 million, while its EPS increased 65.7% year-over-year to $1.84.

Analysts expect ESNT’s EPS and revenue for its fiscal 2021 to increase 49.7% and 6%, respectively, year-over-year to $5.81 and $1.01 billion. Over the past nine months, the stock has gained 6.6% in price to close yesterday’s trading session at $45.46.

ESNT’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

It has a B grade for Stability and Sentiment. It is ranked #14 in the 138-stock Financial Services (Enterprise) industry. Click here to check the other ratings of ESNT for Growth, Value, Momentum, and Quality.

Stocks to Avoid:

Rocket Companies, Inc. (RKT)

RKS in Detroit, Mich., is a holding company that consists of real estate, mortgage, and e-commerce businesses. It operates in the Direct to Customer and Partner Network. Its Direct to Customer consists of performance marketing and direct engagement through the Rocket mortgage application.

For its fiscal third quarter, ended September 30, 2021, RKT’s adjusted revenue decreased 33.3% year-over-year to $3.20 billion. The company’s adjusted net income decreased 52.9% year-over-year to $1.14 billion, while its adjusted EBITDA decreased 52% year-over-year to $1.57 billion. Also, its adjusted EPS decreased 53.2% year-over-year to $0.57.

RKT’s EPS for the quarter ending December 31, 2021, is expected to decrease 67.5% year-over-year to $0.37, and its revenue for the quarter ending March 31, 2022, is expected to decline 47.7% year-over-year to $2.40 billion. Over the past year, the stock has lost 24% in price to close yesterday’s trading session at $15.42.

RKT’s POWR Ratings reflect bleak prospects. It has a D grade for Stability and Sentiment. Again, it is ranked #110 in the Financial Services (Enterprise) industry. To check the additional ratings of RKT (Growth, Value, Momentum, and Quality), click here.

PennyMac Financial Services, Inc. (PFSI)

PFSI is a specialty financial services firm that operates in the production; servicing; and investment management segments. The production and servicing segments are in the mortgage banking business. The production segment performs loan origination, acquisition, and sale activities, while the servicing segment administers the servicing of loans, execution, and management of early buyout loan transactions. PFSI is headquartered in Moorpark, Calif.

PFSI’s pre-tax income for its fiscal third quarter, ending September 30, 2021, decreased 53% year-over-year to $339.50 million. The company’s net income decreased 53.4% year-over-year to $249.31 million. And its adjusted EBITDA declined 31.9% year-over-year to $524.50 million.

Analysts expect PFSI’s EPS for the quarter, ending March 31, 2022, to decrease 41.7% year-over-year to $3. Its revenues for the quarter ending December 31, 2021, are expected to decline 44.2% year-over-year to $764.87 million. Over the past month, the stock has lost 2.4% in price to close yesterday’s trading session at $64.97.

PFSI’s weak fundamentals are reflected in its POWR Ratings. It has an F grade for Growth, and a D grade for Stability. It is ranked #53 in the Financial Services (Enterprise) industry. Click here to check the other ratings of PFSI for Value, Momentum, Sentiment, and Quality.

RKT shares fell $0.10 (-0.65%) in premarket trading Wednesday. Year-to-date, RKT has declined -24.23%, versus a 25.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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