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A Major Bounce for a Quality Stock

Jeff Remsburg

Louis Navellier’s top pick for 2020 has been surging following a painful selloff. Is its sector back to being a “buy”?

***A huge “thank you” to everyone who joined us last night

To begin, we want to say “thanks” to the thousands who joined Matt McCall last night for his 2020 Crypto Millionaire Summit: Last Call event. As the “halvening” catalyst approaches, bitcoin has started to break out and is leaving the stock market in the dust. We anticipate a handful of elite altcoins will do even better.

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If you want to learn which ones Matt is recommending — the ones he believes could jump 1,000% or more — you can catch the replay of last night’s event by clicking here.

***Phew … Louis Navellier’s pick for InvestorPlace’s Best Stocks for 2020 contest really took it on the chin

In March, over a period of roughly two weeks, it dropped 56%.

Of course, that’s not the full story …

After re-testing its low a few days later, the stock has erupted, shooting 81% higher …

As I write, the stock is just 8% lower on the year (Louis’ subscribers are still sitting on gains based on his official recommendation in November).

And while the sector in which it operates still faces challenges today, this company’s strength should help it ride out lingering Coronavirus-related weakness.

Today, let’s turn our attention back to private mortgage lender, PennyMac Financial, and see what’s going on in the private mortgage lending market.

***How the world looked four months ago

As 2019 turned into 2020, the housing market was preparing for a banner year.

U.S. existing home sales had risen 3.6% in December. On a year-over-year basis, existing home sales were up 10.8% from December 2018.

Plus, the average interest rate on a 30-year fixed mortgage was relatively low, coming in at 3.65%.

On top of that, there was a shortage of new homes on the market. As of the end of December 2019, there was only a 3-month supply of homes on the market. That was the lowest in National Association of Realtors (NAR) records in two decades.

Finally, expectations were the Fed would keep rates low for all of 2020.

Put it all together, and you had a U.S. housing market looking ready to boom.

Enter Louis Navellier and his pick, PennyMac Financial (PFSI) for InvestorPlace’s Best Stocks for 2020 contest.

Here’s Louis from back in December:

PennyMac Financial Services (NYSE:PFSI) is certainly one of my favorite picks for the coming year.

Why? Because it is perfectly positioned to take advantage of one of the biggest trends in the U.S. economy: housing …

… the Federal Reserve has spent the whole year reverting to a very accommodative monetary policy. Low interest rates are here to stay and banks are lending.

This all bodes well for both the housing industry and home buyers. Even renters that are looking to upgrade will benefit from lower construction costs, since more availability means more price competition …

Now, one good thing about going with PFSI as a way to play a housing boom, rather than, say, a homebuilding company, is that PFSI can rake in profits from both new construction sales and existing home sales. As long as buyers need mortgages, PennyMac has a customer.

Here was Louis on that note:

Another strength that PFSI has is that it not only benefits from new home sales, which are on the rise, but also existing home sales, which are also gaining momentum again.

Put it all together, and things were looking rosy for PFSI.

***Keep in mind, Louis wasn’t recommending PFSI on a hunch, or based solely on the hope of a housing boom

Louis recommends all his stocks according to his algorithmic, numbers-based approach to the markets.

There are eight key metrics Louis considers when analyzing a stock. Strong sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow, and return on equity.

This quantitative strength is what has helped fuel PFSI’s roaring comeback in recent weeks. In other words, PFSI is a great example of why Louis’ stocks tend to bounce — they have the fundamentals to support growth.

Now, from Louis’ original “buy” recommendation to his Breakthrough Stocks subscribers on 11/8/19, through PennyMac’s most recent high in early February, the stock surged 26%.

But then, we all know what happened next …

***The Coronavirus kneecapped the U.S. economy practically overnight

With the majority of the nation on lockdown, new home sales dropped.

NAR data from yesterday shows that, in March, its pending home sales index fell to a reading of 88.2, down 20.8% from February.

Overall, U.S. home resales fell by 8.5% in March. That’s the most in nearly four-and-a-half years.

This decline in home sales was punch #1 to the private mortgage-lending sector. But punch #2 has come from existing homeowners being unable to pay their existing mortgages.

From CNBC:

As the economic shutdown drags on and job losses mount, more borrowers are opting to delay their monthly mortgage payments through mortgage forbearance plans …

Just over 3.4 million borrowers, representing 6.4% of all mortgages outstanding, are now in forbearance plans. That’s an increase of 477,000 loans in just one week, or a nearly 9% jump …

This has weighed heavily on lenders — especially because the fed has not yet stepped in to help offset a liquidity crunch.

From our April 6th Digest:

… the stimulus bill signed by the president two weeks ago allows a homeowner with a federally backed home loan to apply for 180 days of loan forbearance if COVID-19 is the cause of the economic hardship …

… while this will provide a bit of breathing room for the homeowner, it leaves mortgage servicers stuck with billions in losses.

And as for that “pause” button, well, these mortgage companies don’t have one. They’re still contractually obligated to continue sending money to investors who buy mortgage bonds — not to mention the tax authorities and insurers.

Fears that private mortgage lenders wouldn’t have the liquidity to meet their debt obligations crushed the entire sector. At the top of this Digest, you saw how badly it temporarily crushed PennyMac.

***But optimistic news about the efficacy of COVID-19 drugs, as well as the slow re-opening of the U.S. economy have helped the private mortgage lending sector rebound

Better still, yesterday we learned that homebuyers may be coming back to the market.

While still lower than this time a year ago, last week, mortgage demand from homebuyers jumped 12%. And while applications to refinance a home loan fell 7% last week, they were still a whopping 218% higher than a year ago.

Meanwhile, low interest rates are luring buyers back into the market.

News from this morning from Freddie Mac shows that the 30-year fixed-rate mortgage is averaging 3.23% — this is the lowest rate in Freddie Mac’s history, which dates back to 1971.

For additional context, we noted a moment ago that the 30-year rate was at 3.65% back at the turn of the year.

The hope is these basement-level rates should serve as a tailwind to PennyMac’s refinancing activities in coming weeks.

***While all this is good news, what about the potential liquidity shortage facing private lenders which helped spark the selloff?

As of yet, federal authorities still haven’t created a special liquidity facility for private mortgage-loan services. So, if you’re considering wading into this sector, it’s critical you consider this risk.

However, factor in these three considerations as well …

First, a week ago, the Federal Housing Finance Agency (which regulates Fannie Mae and Freddie Mac) announced that private mortgage servicers would be required to continue making bond payments for four months. This is good news in that Fannie Mae usually requires payments be made for up to a year.

It’s unclear what happens at the end of those four months, but it appears lenders will be “off the hook” to some degree at that point. This news alone is a big sigh-of-relief for lenders who had been staring down 12 months of cash-crunch, having to “take one for the team.”

Second, PennyMac specifically is limiting its downside by telling mortgage originators that it won’t buy any loan that is currently in forbearance. Beyond that, PennyMac may force originators to buy back a loan that goes into forbearance within 15 days of PennyMac buying it.

Third, even though no federal liquidity facility for private mortgage-loan services has been announced so far, it’s inconceivable that if these private lenders began to flounder in significant numbers, the Fed wouldn’t step in.

After all, with the housing market representing around 15% – 18% of the U.S. GDP, do you think the Fed will allow mortgage lenders to fall, tipping off a succession of dominos that reverberates throughout the entire economy?

Highly unlikely — especially not after yesterday, when Fed Chair Powell pledged aggressive action to offset greater economic distress to the economy.

***Put this all together, and we’re seeing a chance to buy one of Louis’ favorite stocks of 2020 for discounted prices

It’s not a total green light — as noted earlier, there’s still the chance for a liquidity crunch in the sector.

But for an investor willing to accept that risk, PennyMac is still a top-shelf mortgage lender currently trading at a 16% discount to its March high.

In case you’re wondering, here’s how PFSI looks today according to Louis’ Portfolio Grader:

As the economy, housing market, and mortgage-lending market improve over the coming quarters, it should serve as a strong tailwind for PFSI.

We’ll continue to keep you up to speed here in the Digest.

Have a good evening,

Jeff Remsburg

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