While I continue my bearish stance on both the American stock market and the US Treasury bond market, new information about one of the stocks that I liked before I turned bearish has caused me to move back into that stock. The stock I have bought back into is the residential mortgage originating and servicing company PHH selling @ 17 per share. The new information is in three parts-
' 40% versus the first quarter... (while) Some of our largest competitors reported quarter-over-quarter application growth of only 7% to 8%. Based on this, we expect meaningful share growth in the third quarter relative to our competitors and we remain committed to achieving our full year market share goal of 5%….'
I believe that the renewed growth in market share in the company's key mortgage origination business combined with its still small market share will result in PHH getting a 'growth stock' image once the residential mortgage market starts to rebound from its @ 75% drop in size (from $4Trillion in 2007 to only @ $1Trillion in 2011). I think the odds are high that the mortgage market size in 2012 will not be lower than 2011.
THIRD: One of the debt rating agencies- Fitch- raised its rating of PHH from BB+ Negative to BB+ Stable
PHH has been IMHO held down in part because the low long term interest rates forces them under accounting rules to show losses as they write down the value of their mortgage servicing rights. Once long term interest rates stop going down then PHH should report earnings of $3 per share. With the potential of 15-20% earnings growth based on taking more market share in the mortgage business I think the stock could surge to over $50 per share. While I concede it will be difficult for PHH to go up in the next 6-12 months if the overall stock market takes the kind of 30-50% drop from current levels (Dow @ 11,353) that I expect, PHH"s low price (@ 70% of tangible book value versus over 3 times tangible book for the market) provides a cushion on the downside.