This mortgage lenders and local bank might be worth a look at
current prices. The housing market remains resilient and
has been a bright spot in an otherwise drab economic
While most homebuilders likeToll Brothers (
) andLennar (
) have been bidding up ahead of their numbers and are trading at
relatively high valuations, companies likeFlagstar (
) are relatively inexpensive on a valuation basis and have seen
their share prices cut by over a third.
The nice think about the mortgage play is that you don't have
to worry if customers are buying new or old homes or what the
cost of lumber or land is. They simply profit from the
transactions, no matter who's buying; as long as the buyer
secures a mortgage of course.
Local Bank with National Exposure
Even though all of Flagstar's physical branches are in the state
of Michigan (They are the largest banking company headquartered
in the state), Flagstar has assets of $14.1 billion and along
with traditional services, is one of the top-tier mortgage
originators in the country and one of the nation's top 15 largest
During the last housing boom, Flagstar was one of the top
lenders amidst a circle of many who didn't live to see the
revival of the space. Flagstar not only emerged from the
great recession (with a few bumps and bruises), but has remained
a strong player in the mortgage origination space.
The fact that the average home price is somewhere around were it
was back in 2004 should be enough to get people interested in
buying a home. Add in record low interest rates, high rents
and a stabilizing job market and you have a recipe for stable
housing growth and price expansion.
The Case-Shiller 20 city home price index (not seasonally
adjusted) is up over 2% since March of 2011 and 8% over the last
12 months. Over the past year we have seen new and existing
home sales on the rise in conjunction with prices, which is an
At the same time, average rent rates have increased over 5%
annually (much more in dense urban areas) adding to the home
Interest rates should remain low for the medium term, but the
specter of an interest rate rise may also nudge those on the
fence to lock in that mortgage and buy a home. An expanded
government refinance program has boosted refinance volumes while
fresh mortgage originations are starting to slowly creep higher.
Banks like Flagstar are also adding profits from gain-on-sale
margins, essentially profits they earn on selling refinanced
loans to investors.
For the next several months, I would expect Flagstar and other
quality banks and lenders to prosper from an improving housing
market in addition to their traditional banking
While it may be true that mortgage originations may slow in
2013, I believe that markets have adjusted the price of FBC in
anticipation of a slower financial sector, giving it a 35%
haircut from its highs of the year. This is extreme when
you compare the stock to many of its peers.
While the stock's fundamentals seem sound, the shares have been
pummeled over the last 5 months, and got slapped with a 6%
correction just yesterday. The selloff started and
accelerated with a break below the 50 day moving average back on
Shares have remained below the 50 day average up until about a
week ago, when the stock made an attempt to breakout above it,
but was shunned by broad market weakness. The recent action
has been volatile, but shares remain above their 200 day moving
average, currently at $12.73.
$13.00 should also be support here and a move down to that
level would put Flagstar in deep over-sold territory and maybe
trigger a bounce. To the upside, I would look for a
recovery to the next resistance level right around $15.30 and
then evaluate an exit if momentum is fading.
Earnings are due out April 23rd and while it carries a Zacks Rank
of 1, the ESP is flat for the stock as it approaches
earnings. This means there is some added risk coming into
the report, but being that analyst coverage is minimal; it's hard
to tell just how bullish or bearish the pros are going into the
Flagstar has managed to beat the Zacks Consensus 4 of the last
4 quarters with an average beat of over 377% (Q3 2012 they
reported $1.40 versus consensus for $0.10).
There is no doubt that Flagstar carries added risk and
volatility with an average daily trading range that's 5% of its
stock price. If you are looking for a more tame
mortgage/banking play here in the States, check outWells Fargo (
) , it trades at just 10 times earnings and recently posted a 22
percent increase in first-quarter profit on April 12th.
Wells Fargo is the nation's largest home lender and they
continued to capture record gains even while mortgage revenue
Flagstar does look intersting here, if you have the risk
appetite for it!
Jared A Levy is one of the most highly sought after traders in
the world and a former member of three major stock exchanges.
That is why you will frequently see him appear on Fox Business,
CNBC and Bloomberg providing his timely insights to other
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"Your Options Handbook"
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. You can discover more of his insights and recommendations
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FLAGSTAR BANCP (FBC): Free Stock Analysis
LENNAR CORP -A (LEN): Free Stock Analysis
TOLL BROTHERS (TOL): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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