Top Picks 2017: NMI Holdings

01/13/2017 6:00 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

My Top Pick for more speculative investors for the coming year is a provider of private mortgage insurance, notes Timothy Lutts, editor of Cabot Stock of the Week.

NMI Holdings (NMIH) was started in 2013 to take advantage of the opportunity presented by the collapse of the industry in the wake of the Great Recession

I think the company will do well over the coming year as the housing industry gains strength.

Fundamentally, the company boasts fast-growing revenues (up 142% in the latest quarter) and growing profit margins (17.4%).

 NMI Holdings is still small in size ($35.5 million in revenue in the latest quarter) and that enables rapid growth. In fact, analysts are expecting earnings to jump 315% in 2017.

The risk profile of NMI’s clients is extremely low (80% of its borrowers have FICO scores above 720) and none are interest-only loans and none are zero-down payment.

As a result, NMI’s loss ratio (ratio of claims that have been paid divided by premiums earned) has hovered just below and above 2% during the past few quarters.

And, as interest rates climb in 2017, the company’s portfolio ($686 million portfolio in fixed income at the end of September, with a weighted-average A credit rating) should benefit.

Technically, the stock has been strong since July, climbing from $5 to $10 in December, and just breaking out into the double-digit levels that institutions prefer later in the month.

As with any low-priced stock, volatility should be expected, but intelligent buying on dips should pay off very well.

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