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10 Best Mortgage Stocks To Buy Now

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Fahad Saleem
·9 min read
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In this article we will take a look at the best mortgage stocks to buy now. You can skip our detailed analysis of the mortgage industry’s outlook for 2021 and some of the major growth catalysts for mortgage stocks and go directly to 5 Best Mortgage Stocks To Buy Now.

The mortgage market in the U.S. is highly volatile given its dependency on a cyclical housing market. Data shows that consumers are avoiding buying new houses as they wait out the current uncertainty caused by the coronavirus crisis. Data shows that the typical homeowner in 2020 had remained in their house for 13 years, compared to 12.8 years in 2019 and 8.7 years for 2010. With mortgage forbearance programs due to end for over 2 million Americans in the coming 3 months, the outlook for the mortgage market looks weak in the short-term perspective. However, this is an opportunity for long-term investors.

Long-Term Investment In Mortgage Stocks Could Pay Off

In 2020, the mortgage market saw a flurry of IPOs. About 8 of the 30 largest U.S. mortgage lenders announced their plans to go public. However, that optimism receded as investors struggled to find value in mortgage stocks amid the current market conditions, joblessness and a tight housing market. According to data by Mortgage Bankers Association, mortgage companies originated a whopping $3.69 trillion worth of mortgages in 2020. But the number is expected to fall to about $2.96 trillion in 2021.

Mortgage company Fannie Mae in January 2021 said that housing growth could slow in 2021 after seeing new highs last year. The company expects home sales to rise by 3.8% in 2021, while purchase mortgage originations are estimated to be at $1.8 trillion, better than the projections of $1.6 trillion in 2020.

10 best mortgage stocks to buy now
10 best mortgage stocks to buy now

Long-term investors interested in mortgage stocks should look beyond the market situation in 2021. Despite the economic recovery, the market will take a while to reach the pre-COVID-19 levels of growth. However, the mortgage market will start to come back in the second half of 2022. The Federal Reserve sees GPD growth of 4% in 2021 and continued growth recovery in 2022 and 2023.

Mortgage stocks are bound to thrive as they are operating in an essential industry. Following the availability of vaccines and declining COVID-19 cases, the economy is set to recover. Americans will continue to buy homes, as they did even in the midst of a pandemic. Despite the uncertainty in 2020 caused by the coronavirus, the housing market saw its best year as Americans bought bigger and better homes, fueled by the necessity to stay and work from home. The S&P Homebuilders Select Industry index is up about 45% over the last 12 months.

In a November 2020 report, Moody’s said that the 2021 outlook for U.S. mortgage insurance sector will remain stable, thanks to the “resilience” of the housing market.

Investors should tread the markets with caution as volatility and uncertainty is making it difficult to make the right decisions. Even the smart money is struggling. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter’s stock picks returned 187.5%, vs. 75.8% for the SPY. Our stock picks outperformed the market by more than 111 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

Let's start our list of 10 best mortgage stocks to buy now.

10. Meta Financial Group, Inc. (NASDAQ: CASH)

South Dakota-based Meta Financial ranks 10th in our list of best mortgage stocks to buy now. The company offers mortgage services, deposits, loans and other financial services. In January 2021, the company posted its quarterly results, with a GAAP EPS of $0.84, beating the Street estimates by $0.33. Revenue in the period jumped 9.2% and came in at $111.5 million, beating the Wall Street estimates by $5.1 million. In full-year 2020, the company’s mortgage-backed securities totaled $2.21 million, compared to $1.87 million posted in 2019.

As of the end of the fourth quarter, 17 hedge funds in Insider Monkey’s database of 887 funds held stakes in Meta Financial Group, Inc., compared to 21 funds in the third quarter. Nantahala Capital Management is the biggest stakeholder in the company, with 1.5 million shares, worth $56.3 million.

9. Rocket Companies, Inc. (NYSE: RKT)

Rocket Companies is the parent company of Quicken Loans, one of the biggest mortgage lenders in the U.S. Quicken Loans rose to become the largest retail lender in the U.S. in 2018. The company relies on wholesale funding and online applications unlike other mortgage lenders. Rocket Companies shares recently rallied after the company declared a special dividend of $1.11 per class A share of common stock.

According to our database, the number of RKT’s long hedge funds positions decreased at the end of the fourth quarter of 2020. There were 16 hedge funds that hold a position in Rocket Companies, Inc. compared to the 22 funds in the third quarter. The biggest stakeholder of the company is Miller Value Partners, with 3.6 million shares, worth $74 million.

8. Walker & Dunlop, Inc. (NYSE: WD)

Maryland-based Walker & Dunlop ranks 8th on our list of 10 best mortgage stocks to buy now. The company offers mortgage loans to customers and financing services to the commercial real estate sector. The company has about 32 branches in the country. The company’s shares recently rallied after its Q4 revenue jumped 61% on a year-over-year basis to reach $349.7 million, while total transaction volume increased by 45% to $14.2 billion.

For 2021, the company expects double-digit growth in its EPS and adjusted EBITDA.

With a $25.8 million stake invested in Walker & Dunlop, Inc., Royce & Associates owns 280,716 shares of the company as of the end of the fourth quarter of 2020. Our database shows that 19 hedge funds held stakes in Walker & Dunlop as of the end of the fourth quarter, versus the 17 funds in the third quarter.

In their Q3 2020 investor letter, Miller Value Partners highlighted a few stocks and Rocket Companies Inc. (NYSE:RKT) is one of them. Here is what Miller Value Partners said:

"Rocket Companies came public in the quarter at $18 per share, before rallying to $34 then trading back down to $20. We entered on the pullback. Rocket is an amazing company with a fabulously successful history and culture. It dominates online mortgage originations. We believe its technology platform and culture provide a unique competitive advantage that will allow it to grow market share, earnings and cash flow over time. The mortgage market is volatile and refi’s are likely to peak this year, which will cause volatility in earnings and potentially the stock. But we believe that taking the long view will pay off. We think that we are getting a great deal paying 14x next year’s earnings for a dominant leader with serious long-term compounding potential.”

7. PennyMac Financial Services, Inc. (NYSE: PFSI)

PennyMac is one of the best mortgage stocks to buy now. The stock is down about 14% over the last 12 months. The company recently went through a leadership change after its CEO passed away due to coronavirus-related complications. In the fourth quarter, the company’s net income totaled to $76.6 million, or $0.78 per share.

As of the end of the fourth quarter, there were 29 hedge funds in Insider Monkey’s database that held stakes in PennyMac Financial Services, compared to 31 funds in the third quarter. Matthew Lindenbaum's Basswood Capital, with 1.5 million shares of PFSI worth $101 million, is the biggest stakeholder in the company.

Gator Capital Management highlighted a few stocks in their Q3 investor letter and PennyMac Financial Services Inc. (NYSE:PFSI) is one of them. Here is what Gator Capital Management has to say about PennyMac Financial Services:

"Mortgage banking companies continued to have strong performance in Q3. PennyMac Financial Services (“PFSI”) was up 39.5%. In Q3, mortgage spreads continued to stay wide like they were in Q2. We hold this position as we expect PFSI to post strong results again in Q3.”

6. Discover Financial Services (NYSE: DFS)

Illinois-based Discover Financial offers mortgage lending services, credit card loans, personal loans and home equity loans. DFS stock is up about 38% over the last 12 months. The company recently said its credit card delinquency rate stabilized in January, coming in at 2.08%, compared to 2.07% in December and 2.65% in January last year.

As of the end of the fourth quarter, 43 hedge funds in Insider Monkey’s database of 887 funds held stakes in Discover Financial Services, compared to 47 funds in the third quarter. Eminence Capital is the biggest stakeholder in the company, with 1.8 million shares, worth $168.8 million.

In one of their investor letters, Diamond Hill Capital highlighted a few stocks and Discover Financial Services (NYSE:DFS) is one of them. Here is what Diamond Hill Capital stated:

"Shares of banking and payment services company Discover Financial Services underperformed amid investor concerns about its core consumer finance business, which could be negatively impacted by the economic fallout from COVID-19.”

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Disclosure: None. 10 Best Mortgage Stocks To Buy Now is originally published on Insider Monkey.