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Kyle Bass Thinks that a Nonbank Mortgage Servicer Is More Effective than Banks

March 17, 2014 | About:
Victor Selva

Victor Selva

9 followers

Kyle Bass (Trades, Portfolio) is the Managing Member and Principal of Hayman Advisors LP’s general partner and is well-known for his analysis of the subprime crisis. On Mar. 13, he added Nationstar Mortgage Holdings Inc. (NSM) at an average price of $31.97 and currently holds 4,759,610 shares of the stock with a current value of $156 million in his portfolio.

This guru made his fortune betting against the sub-prime CDOs, so let's take a look at this company and try to explain to investors the reasons why he is betting on it.

Increasing Stake

The company is a real estate services company engaged primarily in the servicing of residential mortgage loans for others and the origination and selling or securitization of single-family conforming mortgage loans to government-sponsored entities or other third-party investors in the secondary market. It operates in two segments, Servicing and Originations.

Few days ago, Mr. Bass increased its stake in the company to 5.3% from about 1.2%, because he thinks that Nationstar is more effective at servicing mortgages than banks. In an interview on CNBC he stated that “We think that this market opportunity will grow from $10 trillion to $11-$12 trillion over the next five years, and (the companies') servicing profitability will increase annually as the number of delinquent loans drop." At least surprising to me after reading that statement, is that the firm is currently Zacks Rank # 4 – Sell. For investors looking for a better Zacks Rank, Home Loan Servicing Solutions, Ltd. (HLSS) could be a better option.

Homeowner’s Complaints

Lawmakers and regulators have been bombarded by complaints from consumers. New York Superintendent Department of Financial Services Ben Lawsky sent a letter to the company indicating it had received "hundreds of complaints from New York consumers" about Nationstar.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 13.8x, trading at a discount compared to an average of 14x for the industry. To use another metric, its price-to-book ratio of 3.1x indicates a premium versus the industry average of 1.8x and the price-to-sales ratio of 1.69x is below the industry average of 2.83x. Two metrics indicate that the stock is relatively undervalued relative to its peers.

Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago. It has demonstrated a positive trend over the past five years. In the next graph we include the stock price because EPS often lead the stock price movement.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. Let´s compare the trailing twelve months (ttm) ratio with competitors in the next table:

Ticker

CompanyName

ROE (%)

HLSS

Home Loan Servicing Solutions

12.08

ESNT

Essent Group Ltd

13.9

FNMA

Federal National Mortgage Association

998.89

NSM

Nationstar Mortgage

24.84

As we can see, the firm has a higher ROE than Home Loan Servicing Solutions and Essent Group Ltd. (ESNT). But for those seeking for a great ROE, the option should be Federal National Mortgage Association (FNMA) with an extremely good ratio of 998.98%.

Final Comment

The firm´s revenues rose about 30% from the same quarter one year prior. On the other hand, apart from the decreased in ROE, net income and gross profit margin are still low, and the stock price is down more than 20% on the same time-frame. All these are demonstrating the company´s weaknesses.

Despite the complaints we mentioned earlier, Nationstar now has a market cap of nearly $3 billion which demonstrates it’s impressively growth in the last couple of years. I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) have also invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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