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Mortgage & Related Services Outlook: Near-Term Prospects Solid
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The Zacks Mortgage & Related Services industry consists of firms that provide mortgage-related loans, refinancing and other loan servicing facilities. The industry is somewhat dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers’ decision to undertake mortgage.
The companies also generate investment income by investing in several financial assets such as residential or commercial mortgage-backed securities, asset-backed securities, equity investments in mortgage-related entities and other strategic investments.
Here are the three major themes in the industry:
High interest rate environment is a major hurdle for mortgage lenders, as higher rates reduce demand for loan originations or refinancing by making cost of borrowing expensive. However, with the Fed’s dovish stance related to future rate hikes, some near-term respite is expected for lenders.
Home sales data has improved so far in 2019 on account of decline in mortgage rates and a stronger labor market. The low rates trend is likely to continue in the near term, thanks to the Fed’s decision to leave interest rates unchanged, and is likely to attract homebuyers’ interest.
Low mortgage rates will raise demand for homes in the United States, which is unlikely to witness a matching supply, mainly due to rising costs of development and shortage of skilled labor. However, a gradual pickup in supply is expected in 2019, which might lead to higher mortgage loan originations.
Zacks Industry Rank Reflects Rosy Prospects
The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #102, which places it at the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 38.6% upward.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector, Lags S&P 500
The Zacks Mortgage & Related Services industry has underperformed the Zacks S&P 500 composite over the past two years, though it has outperformed the broader Zacks Finance sector.
The industry has registered growth of 18.4% during this period compared with the S&P 500’s rally of 19.6%. Meanwhile, the broader sector has registered growth of 7.5%.
Two-Year Price Performance chart
Industry’s Valuation
On the basis of price-to-book ratio (P/BV), which is commonly used for valuing mortgage loan providers, the industry currently trades at 1.96X versus 3.98X for the S&P 500.
This compares to the industry’s highest P/BV of 2.76X and median of 1.85X over the past five years.
Price-to-Book Ratio (TTM) Chart
As finance stocks typically have a lower P/BV ratio, comparing mortgage loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/BV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/BV of 2.61X for the same period is way above the Zacks Mortgage & Related Services industry’s ratio, as the chart shows below.
Price-to-Book Ratio (TTM) chart
Bottom Line
Mortgage stocks will likely reap benefits from relatively stable interest rates, favorable operating environment and improving economy. Also, gradual ease in lending standards in the form of reduced documentation requirements and lower credit scores, might help mortgage companies bag higher loan originations in the coming quarters.
We are presenting one stock with a Zacks Rank #2 (Buy) that investors may consider betting on.
Essent Group Ltd. (ESNT - Free Report) : The stock of this Hamilton, Bermuda-based lender has gained 27.6% over the past two years. The Zacks Consensus Estimate for the current-year earnings has been revised 1.5% upward over the past 60 days.
Price and Consensus: ESNT
Also, investors may hold on to the following stocks, as they have been seeing positive earnings estimate revisions, and have solid long-term growth potential. Both the stocks currently carry a Zacks Rank #3 (Hold).
Ellington Financial LLC (EFC - Free Report) : The Old Greenwich, CT-based bank has rallied 8% over the past two years. The consensus estimate for current-year earnings has been revised 7.1% upward over the past 60 days.
Price and Consensus: EFC
PennyMac Financial Services, Inc. (PFSI - Free Report) : The consensus estimate for current-year earnings for this Moorpark, CA-based financial service provider has moved 3.6% higher over the past 30 days. The stock has rallied 39.8% over the past 24 months.
Price and Consensus: PFSI
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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Mortgage & Related Services Outlook: Near-Term Prospects Solid
The Zacks Mortgage & Related Services industry consists of firms that provide mortgage-related loans, refinancing and other loan servicing facilities. The industry is somewhat dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers’ decision to undertake mortgage.
The companies also generate investment income by investing in several financial assets such as residential or commercial mortgage-backed securities, asset-backed securities, equity investments in mortgage-related entities and other strategic investments.
Here are the three major themes in the industry:
Zacks Industry Rank Reflects Rosy Prospects
The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #102, which places it at the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 38.6% upward.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector, Lags S&P 500
The Zacks Mortgage & Related Services industry has underperformed the Zacks S&P 500 composite over the past two years, though it has outperformed the broader Zacks Finance sector.
The industry has registered growth of 18.4% during this period compared with the S&P 500’s rally of 19.6%. Meanwhile, the broader sector has registered growth of 7.5%.
Two-Year Price Performance chart
Industry’s Valuation
On the basis of price-to-book ratio (P/BV), which is commonly used for valuing mortgage loan providers, the industry currently trades at 1.96X versus 3.98X for the S&P 500.
This compares to the industry’s highest P/BV of 2.76X and median of 1.85X over the past five years.
Price-to-Book Ratio (TTM) Chart
As finance stocks typically have a lower P/BV ratio, comparing mortgage loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/BV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/BV of 2.61X for the same period is way above the Zacks Mortgage & Related Services industry’s ratio, as the chart shows below.
Price-to-Book Ratio (TTM) chart
Bottom Line
Mortgage stocks will likely reap benefits from relatively stable interest rates, favorable operating environment and improving economy. Also, gradual ease in lending standards in the form of reduced documentation requirements and lower credit scores, might help mortgage companies bag higher loan originations in the coming quarters.
We are presenting one stock with a Zacks Rank #2 (Buy) that investors may consider betting on.
(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)
Essent Group Ltd. (ESNT - Free Report) : The stock of this Hamilton, Bermuda-based lender has gained 27.6% over the past two years. The Zacks Consensus Estimate for the current-year earnings has been revised 1.5% upward over the past 60 days.
Price and Consensus: ESNT
Also, investors may hold on to the following stocks, as they have been seeing positive earnings estimate revisions, and have solid long-term growth potential. Both the stocks currently carry a Zacks Rank #3 (Hold).
Ellington Financial LLC (EFC - Free Report) : The Old Greenwich, CT-based bank has rallied 8% over the past two years. The consensus estimate for current-year earnings has been revised 7.1% upward over the past 60 days.
Price and Consensus: EFC
PennyMac Financial Services, Inc. (PFSI - Free Report) : The consensus estimate for current-year earnings for this Moorpark, CA-based financial service provider has moved 3.6% higher over the past 30 days. The stock has rallied 39.8% over the past 24 months.
Price and Consensus: PFSI
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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