Home Loan Servicing, Other Financials Outperforming

By
A A A

Winners sometimes move in a pack.

Right now, the financials are producing a load of winners.

They includeWalter Investment Management ( WAC ), up 119% since the market's low in June;Ocwen Financial ( OCN ), up 138% in the same period; andNationstar Mortgage Holdings ( NSM ), up more than 80% until Wednesday's rout.

All belong to the Finance-Mortgage & Related Services industry group, which was No. 1 among 197 groups as of Wednesday's IBD. Add a fourth to the winners list:Home Loan Servicing Solutions ( HLSS ), a February IPO that has risen 43% since June 1. Home Loan Servicing is different from the other three stocks in one respect: It pays a dividend. The dividend of 11 cents a share is paid monthly. The annualized yield is 6.8%.

Home Loan said in its 10-Q for the third quarter that it intends to distribute "at least 90% of our earnings in the form of monthly cash dividends." Unlike companies that operate under pass-through arrangements, Home Loan isn't required by law to pay out that much of a percentage in dividends.

The company doesn't originate loans, but acquires and services them. In March, Home Loan used proceeds from its initial public offering to buy a $15.2 billion mortgage-servicing portfolio from Ocwen. Later, Home Loan made four more purchases from Ocwen.

Home Loan plans to acquire additional assets -- at least for now, chiefly from Ocwen -- by using cash flow in excess of the dividend and by issuing additional shares when appropriate.

Earnings were 33 cents and 34 cents a share in the past two quarters vs. losses of 1 cent a share in the year-ago periods. The Street expects EPS of 39 cents in Q4.

Risk factors are tied to the housing market. While real estate appears to be rebounding, a second round of increased delinquencies and defaults would hurt Home Loan. Also, if things got too good, a sharp increase in mortgage prepayments would hurt profitability.

For investors, an additional risk is a secondary offering. While none is scheduled, Home Loan expects to make such a move "from time to time," which would dilute shares.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: HLSS , NSM , OCN , WAC

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

83,946,369
  • $16.40 ▼ 1.20%
65,919,147
  • $102.99 ▲ 0.51%
63,004,409
  • $42 ▲ 4.53%
42,618,740
  • $7.93 ▼ 2.94%
41,388,613
  • $78.37 ▼ 0.41%
40,438,996
  • $3.81 ▲ 14.76%
39,835,674
  • $12.32 ▲ 2.41%
38,147,728
  • $12.83 ▼ 2.80%
As of 10/22/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com