Revealed: The Secret Behind The Top Mutual Fund On The Planet

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With a return of 43.9% over the pastyear , FortressInvestment Group ( FIG ) 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 ( NSM ).

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 ( JRS ) to subscribers of her Daily Paycheck 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 continue?

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 million).

NSM recently purchased a mortgage portfolio from Bank of America ( BAC ) 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.



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.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: BAC , FIG , JRS , NSM

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