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A Hot Niche in Finance

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This week, I have been reading a lot of comments -- from Zacks strategists and subscribers alike -- about the Financial Sector. That is, how to play it, if there is any coming earnings and estimate revision strength, etc. etc.

I looked into the top-down Zacks Industries.  Lo and behold, the very top-ranked Zacks Industry, ranked number 1 out of 265 groups, up +1 over the last week, and with a solid eight companies in it, is Finance-Mortgage and Related Servicers.

Out of the eight companies, four are currently Zacks Ranked #1, two are Zacks Ranked #2, with one of those a Zacks Rank #1 a week ago.  Pretty impressive stuff!  The lowest current Zacks Rank is a #3.

How does this fit into the big macro picture?  

First of all, these are mostly small and mid cap financial companies -- in a niche business area that is growing with re-financing and issuance of mortgages.  

Niches. What Kevin Cook and I agreed is one place to look for opportunities in the Financial Sector earlier this week.  It also tells us where one pocket of strength may be found inside balance sheets of larger diversified entities.

This type of finance activity underpins the rise in single-family starts and sales, and apartment and condo construction.  

Doing my macro homework, I re-produced the composite National Case-Shiller single-family home price index over the last twenty plus years.

A sobering exercise!

We do see apparent price stability in the current home price index.  But the graph also serves to remind us of the huge bubble lurking behind in time.  

See the graph below.

Kevin and I traded emails this morn.

A few cautious comments seem appropriate:

  • There must be millions of underwater homeowners considering their options.  Walking away and declaring a bankruptcy is one of them. Fannie and Freddie and Fed balance sheets are looming policy issues, and introduce even more overhang and uncertainty to the mortgage sector.
  • Atlanta Fed president Dennis Lockhart said this week he is concerned about the markets for Treasuries and mortgage-backed securities. The Fed each month is buying $45 billion in Treasuries and $40 billion in mortgage bonds. “Markets are highly connected and highly interrelated so a severe spell of financial instability obviously would be much broader than the markets in which we are making the purchases,” Lockhart told reporters in Atlanta. He said he sees “no immediate threats.”
  • Bank regulators don’t always act quickly enough to defuse challenges to financial stability, said Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp. “Sometimes we know a lot and the problem is we are not acting on what we know,” said Bair, a senior adviser to The Pew Charitable Trusts. “I worry that there is still too much” inertia among supervisors of financial firms.

Nonetheless, here are the Zacks Rank #1 mortgage finance and servicing companies available to investors.  Two are small cap companies that offer sizable yields (6.6% and 13.9%).

Small Mortgage REITs

Home Loan Servicing Solutions
, Zacks Rank #1, Outperform, Small Cap Value, $607M Market Cap, 6.6% Yield.

HLSS focuses on acquiring mortgage-servicing assets consisting of mortgage servicing rights, rights to mortgage servicing rights, associated servicing advances and other related assets. It intends to engage residential mortgage loan servicers to service the pools of mortgage loans underlying the mortgage servicing rights. Home Loan Servicing Solutions, Ltd. is based in George Town, Cayman Islands.  

Javelin Mortgage Investment Corp. Zacks Rank #2, recently #1, no rating, $149M Market Cap. 13.9% Yield, REIT, Small Cap.

JMI invests and manages a leveraged portfolio of agency mortgage-backed securities, non-agency mortgage-backed securities and other mortgage-related investments. It invests primarily in hybrid adjustable rate, adjustable rate and fixed rate Agency RMBS and non-Agency RMBS.

The company has elected to be taxed as a real estate investment trust for U.S. Federal income tax purposes, commencing with its taxable year ended December 31, 2012. Javelin Mortgage Investment Corp is based in Vero Beach, United States.

Large and Mid Cap Mortgage Originators and Servicers

Nationstar Mortgage Holdings, Inc.
(NSM - Free Report) , Zacks Rank #1 and Outperform, $3.6B Market Cap, 0.0% Yield. Large Cap Growth

NSM is a mortgage lender. It services loans throughout the United States and originates primarily conventional agency and government residential mortgage loans and also offers a diverse array of complementary services for mortgage investors. Nationstar Mortgage Holdings, Inc. is headquartered in Lewisville, Texas.

PHH Corp. Zacks Rank #1, Outperform. $2.6B Market Cap. Mid Cap Value

PHH is a leading outsource provider of mortgage and vehicle fleet management services. It is the sixth largest retail originator of residential mortgages in the United States and the second largest fleet management services provider in the United States and Canada.

Multi-Family Lending

Walker & Dunlop, LLC
(WD - Free Report) Zacks Rank #1, Outperform, 0.0% Yield, $658 Market Cap, Small Cap Value

WD is engaged in providing commercial real estate financial services in the United States, with a primary focus on multifamily lending. The Company also offers service loans for life insurance companies, commercial banks and other institutional investors as a loan broker. The Multifamily and FHA Finance groups of Walker & Dunlop are focused on lending to property owners, investors, and developers of multifamily properties across the country.

The Capital Markets and Investment Services groups provide a broad range of advisory, financing, investment consulting and related services. Walker & Dunlop's Healthcare Finance group provides debt financing for healthcare properties.

The Company's Principle Investments include origination, underwriting, execution and management of commercial real estate opportunities across property types and geographies within the continental United States. Walker & Dunlop, LLC is based in Bethesda, Maryland.

In-Depth Zacks Research for the Tickers Above

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