Moving Into Mortgage Names

 | Sep 06, 2012 | 5:30 PM EDT
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Last week, I wrote about some construction and home-improvement stocks that are benefiting from optimism about the housing sector. A related subsector that has been a solid performer for the past few months is mortgage services.

A heavy-volume gainer this week has been Walter Investment Management (WAC), a real estate investment trust (REIT) that invests in subprime residential loans. The company is acquiring Reverse Mortgage Solutions, which investors clearly see as being a growth driver for Walter.

Demographics favor this deal, which was valued at $120 million. A reverse mortgage allows homeowners take out a loan against a paid-for house to supplement income. The product is typically marketed to retirees and often hawked by well-known TV actors, including Robert Wagner, Fred Dalton Thompson, James Garner and Henry Winkler.

As of Thursday, Walter shares were up nearly 18% for the week in heavier-than-average turnover. Even before the RMS deal was announced, the fundamental case was bullish. Walter was showing triple-digit revenue growth in each of the past four quarters, and earnings growth has been increasing at double- or triple-digit rates.

Analysts are eyeing income of $2.72 per share this year, a gain of 83%. That's seen growing another 60% next year, to $4.34 per share.

Walter is a small company, with a market cap of $949 million. It trades an average of 191,000 shares per day. After this week's move, it's currently out of buying range, but a pullback to a short-term moving average, or a series of tight weekly closes, may offer a new entry opportunity. As of now, however, that is nowhere in sight. The stock was vaulting higher along with the general market in Thursday's rally, rising to its best levels since March 2008.

Another mortgage-related mover has been pulling back from its highs this week. Nationstar Mortgage (NSM), a non-bank residential lender, rallied to an all-time high of $30.07 Wednesday, but finished the session lower. It was getting solid support above its five-day exponential line on Thursday.

This has the "new" factor in its favor. The stock went public at $14 in March, and has more than doubled since then. Young companies often are well positioned to show solid revenue and earnings growth, as management is enthusiastic and brings fresh ideas to the table. In addition, while the company is still in growth mode, there is plenty of room to run. That's in contrast to more mature companies that may have saturated much of their market.

Nationstar is expected to earn $2.41 per share this year, up more than 900% from last year's $0.24 per share. In July, it completed its acquisition of Aurora Bank's mortgage servicing arm, which significantly grew Nationstar's book of business.

I like the medium-to-long-term prospects for this stock, and I'm content to just wait out the current pullback. If the stock continues to get moving average support, that would be a good signal that it could be setting up for another round of buying.



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