Here is my best value stock to buy right now

Finding value when the stock market sets new records tends to be difficult. Investors should be careful not to buy stocks as earnings peak. This is often the difference between a valuable stock and a value trap. Sometimes a stock is cheap because the market doesn’t give the company any credit for a line of business or some kind of asset. The market has defeated the mortgage real estate investment trust New Residential (NYSE: NRZ) – but this does not give sufficient credit to the cash-generating operating activity of the company.

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New residential ranks among the highest echelons of mortgage lenders

New Residential has three main areas of activity: mortgage investment, maintenance and assembly. I recently wrote about New Residential’s service portfolio and how it might help mitigate the effects of the Federal Reserve’s impending reduction in asset purchases. But investors should also be aware of New Rez’s mortgage origination business.

New Residential has strengthened its mortgage origination business and recently completed the purchase of Caliber Home Loans. This transaction places New Rez in the top five of non-bank lenders in the United States and, on a pro forma basis, it funded $ 45 billion of origination in the second quarter.

Unlike mortgage REITs, mortgage originators typically trade well above book value, especially those who primarily interact with the borrower, as opposed to those who purchase completed loans from smaller lenders. Mortgage REITs rely primarily on interest income, but originators have the flexibility to make one loan, sell it, and make another.

At the end of 2020, New Residential estimated there was between $ 2.90 and $ 6.52 per share in hidden value with mortgage origination activity – and that figure ignored the deal. Caliber. With the acquisition of Caliber, that number is expected to grow, given that Caliber has a strong retail presence and a strong buying market presence, which is worth more than the typical correspondent-type lender that New Residential had before. acquisition. This is important because the buying market is much more stable than the refinancing market. If rates go up, refinancing opportunities decrease dramatically, but people are still buying homes. A point of sale that has an office and loan officers in the field, will talk to real estate agents, will have a much more stable flow of business than a lender who relies on buying loans from other, smaller lenders. . This is why Caliber adds so much value to New Residential.

Mortgage originators trade at a premium over mortgage REITs

New Residential should be seen as a sum of the parts story, with neglected assets that investors don’t factor into the share price, leading to a lower valuation than it deserves. In these circumstances, the company may find it beneficial to part with these assets in order to assign a value to them. New Residential discussed such a possibility last year.

New Residential has historically been primarily a mortgage REIT and like most mortgage REITs trades based on dividend yield and book value. At the end of June, the company had a book value per share of $ 11.27 and is trading at a discount of 3% per share. This is a typical multiple for a mortgage REIT these days, and you can think of the book value as “fair value”.

But the ability of mortgage originators to “recycle” their assets makes them more valuable. If you look at the other major non-bank originators (Rocket, UWM Holdings, Loan deposit, and PennyMac Financial), you’ll see that these stocks typically trade around three times the book value per share.

New Residential will likely update shareholders on the combined mortgage bank’s projected earnings and book value when it reports third quarter earnings in October. At this point, we will have a better indication of the intrinsic value of mortgage origination transactions.

The company just increased its dividend to $ 0.25 per quarter, giving the stock a dividend yield of over 9%. That’s way above the typical mortgage lender, and more compliant with mortgage REITs. With New Residential, you get the stable income of a mortgage REIT with the operating company, which offers growth potential down the road. New Residential is the type of stock that would appeal to both a value investor and an income investor.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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