Refinance This 4-Pack
06/13/2003 12:00 am EST
"We hold a core portfolio position in mortgage/real estate stocks; so far, they are up and heading higher, significantly higher," says John Dessauer, editor of Investor's World. "The reason is compressed valuations because of extreme stubbornness about interest rates by economists, analysts, and investors. They have been wrong. They will change, and when they do, valuations on these stocks will soar. Mortgage banking-related stocks are up, but still far from their peak values. These are all winners that we can let run."
"Countrywide Financial (CFC NYSE) should be trading at a price of at least $100, at a normal P/E of ten, or $170+ if market sentiment returned to 1998 levels. In 1998, Countrywide earned $3.29 a share. This year’s earnings will be more than triple 1998, and heading higher in 2004. Countrywide is at a new high, but it should be over $100 within 12 months. That is sufficient upside potential to keep Countrywide rated as a Buy. The risk is that the economy grows much faster than I envision and interest rates begin to rise again. However, that risk is low until we see a significant acceleration in the rate of US economic growth.
"IndyMac (NDE NYSE) is a good pick, especially if you seek income along with capital gains potential. With interest rates so low, income from bank CDs and short-term bonds is just a trickle. IndyMac has restored its dividend at $0.10 per quarter. At $0.40 per year, that is a current yield of 1.55%, but management has pledged to raise the dividend in line with earnings. Five years from now, the dividend may be more than $1.00 a share. CEO Michael Perry is only 40 years old, but he is a seasoned veteran of the mortgage banking business. He changed the company from a REIT to a savings & loan and then used excess capital to buy back stock. IndyMac has reduced outstanding shares by 34%. Perry’s vision for IndyMac is to follow a conservative, hedged business plan, control costs and gain market share in mortgage banking by using technology to the fullest. IndyMac earned $2.00 a share in 2001. Earnings this year are likely to be 50% higher. I expect the stock to move to a new record high above $30 as soon as analysts take the new lower mortgage rates into account. My target for IndyMac is now $45.
"Every new mortgage and refinancing requires title insurance. Title insurance can be a tedious, time-consuming search through dusty volumes of records in county clerks’ offices. First American (FAF NYSE) invested heavily in modern technology to make computer-based title searches in as many parts of the country as possible. That system, called FAST, has been rolled out. Cost savings will follow, in the second half of this year. Put low long-term interest rates together with the cost savings from FAST, and you have the potential for explosive growth in earnings. In early March, analysts raised estimates for First American from $1.85 to $2.74, based on better-than-expected revenues in the first quarter. Wall Street’s interest rate assumption is wrong, so earnings are probably going to be revised up again, most likely to $3. First American is a cash machine. Free cash flow this year will be more than $4.50 a share. First American also pays a dividend, $0.40 a share per year. That dividend is likely to be raised. This is another powerful story of a well-run company poised to deliver significant earnings growth. First American is a buy. My 12-month target is $45.
"Cendant (CD NYSE) benefits from low long-term interest rates in several ways. The most obvious is real estate and mortgage banking. Cendant has a substantial mortgage banking business and is the largest franchiser of real estate broker services. Cendant is involved in one of every four homes bought or sold in the US. It is also the largest provider of business relocation services. Lower long-term interest rates mean that real estate will remain strong for 2003 and all of 2004. Cendant’s revenues and earnings from real estate activities will be better than expected. Cendant has been reducing debt but still has more than $5 billion in long-term debt. Lower long-term rates give Cendant the opportunity to reduce interest costs by refinancing part of that long-term debt. I expect Wall Street to be raising earnings estimates for Cendant in the coming months. Cendant traded above $20 in 1999, 2000, 2001, and 2002. I think 2003 will be another year above $20."
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