Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2020 contest. Louis Navellier’s pick for the contest is PennyMac Financial Services (NYSE:PFSI).
PennyMac Financial Services (NYSE:PFSI) is the fourth-largest originator and sixth-largest loan servicer in the U.S. And it’s only been around 12 years.
What’s more, the company is still outperforming the broader stock market. Granted, it has been hit by the big drop in recent weeks, but its relative success shows two things.
First, it shows that PFSI stock was on a strong upward trajectory until the coronavirus from China started hurting the housing market.
And second, it shows that its underlying value is understood by institutional investors on Wall Street and beyond. If it was a middle-market player with a $2 billion market capitalization and no real prospects for success, the big players would have wiped it out.
But they haven’t.
A Housing Market Rebound Will Boost PFSI Stock
And now that the Federal Reserve, Congress and the White House have decided to do what it takes to save the U.S. economy, PFSI’s prospects are very bullish indeed.
The housing market may not snap back immediately. But there are huge private investment firms that can borrow money for next to nothing and buy huge amounts of properties. They can then sell them off as prices rise.
What’s more, they have the opportunity to sit with those properties for years without it bothering their bottom line much.
In February, before the coronavirus hit the U.S., PFSI stock was upgraded to an “outperform” by analysts on Wall Street. These analyst knew that the coming real estate boom was happening. The Fed had already signaled its intent to drop rates as low as possible to keep the consumer — and financial firms — feeding the economy.
And along those same lines, PFSI has a sister company that’s a real estate investment trust (REIT), PennyMac Mortgage Investment Trust (NYSE:PMT). PMT packages mortgages relative to their quality and then manages those portfolios. This is extremely helpful to both sides of PennyMac, since PFSI has a partner that will take its mortgages and manage a business that will add their performance.
Having that business so close is a great advantage.
The Bottom Line
Another bullish sign for PFSI stock is the fact that real estate isn’t a quick-moving sector. Now that rates are so low, it’s unlikely they’ll rise significantly for years. That will power a credit boom and create potential homebuyers that were sitting on the fence before this no-rate environment appeared.
It likely won’t be a V-shaped recovery for the real estate sector. But PFSI stock will have a much better rebound than many of its weaker counterparts. That’s particularly true because this time around — compared to 2008 — the Fed has already anticipated the challenges that will occur as millions of workers lose their jobs. One consequence is that higher unemployment rates could have a negative effect on loan repayments.
But the government is ready to help both the consumer and the lender work through these challenges. This cooperation should prevent the downside that drove the Great Recession.
PennyMac Financial delivers a 1.1% dividend, which isn’t a lot. But it certainly is better than keeping your money in a CD or money market.
Reinvesting those dividends also is an easy way to own more PFSI stock over time.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.