With a return of 43.9% over the pastyear ,
FortressInvestment Group (
is currently the top-performingmutual fund on themarket .
The company began operations as aprivate equity firm in 1998
with $400 million under management. Between 1999 and 2006, the
firm averaged a return of 39%. And today, operating as a mutual
fund, the group manages more than $54 billion.
Thefund 's success merits a closer look, and while reviewing
the company's portfolio, I made a surprising discovery.
Most mutual funds tend to maintain a more conservative
portfolio of holdings that encompass a wide variety of market
sectors. And most fund's largest holding rarely makes up more
than 25% of the portfolio.
But Fortress is different.
In fact, in the company's current holdings, just onestock
makes up 43% of the overall portfolio. Fortress owns more than 67
millionshares of this company -- a total investment of over $3.1
billion at today's prices.
And so far, Fortress' decision toput over $3 billion worth of
eggs in one basket has been right on themoney . The stock has
been on a tear: up 49% since January, 110% during the past 12
months, and 225% over the past three years.
The name of the company?
NationstarMortgage Holdings (
Regular StreetAuthority readers know that ouranalysts have
beenbullish on housing for years. And our newsletter subscribers
have made alot of money following our writer's recommendations.
StreetAuthority expert Amy Calistri recommended shares of
NuveenReal Estate CEF (
to subscribers of her
newsletter back in September 2010. So far, her readers are up 54%
on the recommendation.
But as with any stock that has shown spectacular results in
the past, how are we to know that this explosive growthwill
Let's start withrevenue . Similar to a bank, Nationstar makes
money by issuinghome mortgages and collecting interest on
theloans . Although the company doesn't get a lot of press,
Nationstar is actually one of the largest mortgage servicers in
the U.S. The company's portfolio includes more than 1.9 million
residential mortgages with $312 billion in unpaidprincipal . When
you consider that Nationstar'smarket cap is "only" $4.4 billion,
you begin to realize the potential for future profits.
Some analysts are concerned that rising interest rates could
stunt the current housing rebound. But due to recent acquisitions
and an increase in service feeincome , NSM's total revenue in
2013 is projected to double the revenue earned in 2012 ($859
NSM recently purchased a mortgage portfolio from
Bank of America (
worth $215 billion. On top of that, it acquired two other
mortgage brokers: Greenlight and Equifax. Although these
purchases have left Nationstar cash-flow negative in the nearterm
, the company made these purchases without going intodebt or
diluting shares with new issuances.
Earnings per share were $2.40 last year. But the company
expects to tripleEPS by next year, with projections ranging
between $6.45 and $7.50.
The price-to-book ratio is high at 5, which makes NSM a
slightly riskier investment at today's (near record-high) prices.
But earnings have been so strong that even with the run-up in
stock price, shares are trading at a forwardprice-to-earnings
ratio of 8.
Risks to Consider:
Rising interest rates and a downturn in the housing market
could have a negative impact on earnings. Like anyloan , the
mortgages Nationstar holds are at risk ofdefault . The company
does not currently pay adividend , so any investment is a bet on
continued growth to generate returns.
Action to Take -->
For speculative investors who believe the housing market will
continue to thrive, Nationstar should be an excellent investment
over the next two years.
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