Investor optimism isn’t just boosting stock prices. I’m seeing inflation in everything from food and tuition prices to lumber and copper prices, cautions Frank Curzio, editor of Curio Research Advisory.
Another booming market is housing. I’ve followed this sector for decades, but I’ve never seen demand as high as it is right now. And when you consider the economic growth that’s coming, this housing boom is likely to last longer than anyone expects.
One company that will benefit is PennyMac Financial Services (PFSI) — one of the biggest mortgage lenders in the U.S. It’s third in the country in terms of loan production, and No. 7 in terms of loan servicing.
Some folks don’t think financial stocks are exciting. But I see multiple catalysts that could send PennyMac soaring over the next year or two.
Home sales grew by 5.6% in 2020. That’s the biggest growth in 13 years. And as of the end of February, the data shows there are just one million homes for sales in the U.S. That’s the lowest supply ever.
Not surprisingly, PennyMac’s business is booming. Its latest results (for Q4) showed record levels in direct lending, loan acquisitions, and originations. Its 2020 net income grew to $1.6 billion. That’s up an incredible 319% vs. 2019.
Meanwhile, shares of PennyMac are down more than 10% since the start of 2021. Wall Street analysts are worried about rising interest rates. They think higher rates will lead to fewer loan originations.
I think these concerns are totally overblown. Most of these guys have been predicting a drop for the past two years or more. But the statistics show the housing market remains in a steady uptrend.
It’s true that interest rates have jumped. They’re currently around 3.2%, but that’s still extremely low by historical standards. Before COVID hit, average 30-year rates were above 4% for most of the previous five years. They almost hit 5% at the end of 2018.
Looking at the consensus estimates, analysts expect PennyMac’s earnings to fall more than 16% this year. And they’re predicting another drop of 33% in 2022. I think these estimates are way too pessimistic. In other words, there’s a lot of room for PennyMac to beat expectations over the next two years.
The current pessimism means we can buy shares for a dirt-cheap price. PennyMac currently trades below 1.4x book value and around 3x forward earnings. That’s an absolute steal considering the housing uptrend.
I know some folks don’t like financial stocks — but PennyMac could double our money over the next 18–24 months. And based on the current valuation, I don’t see much downside. Buy PennyMac Financial Services up to $64. Use a 25% hard stop from your cost basis.
