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Top Picks 2021: Newtek Business Services (NEWT)
01/08/2021 5:30 am EST
This is a business development company with income coming from participation in the SBA 7a program, where it makes money selling off the SBA loans it originates and then servicing them.
NEWT has a closer than average relationship with their borrowers and is able to cross-market various services. This is why they were able to take advantage of the PPP program as they could quickly identify borrowers who qualified needed the loans and already had the trust of the borrower.
Small Business Administration loans (SBA Loans) are a big driver of profits. NEWT originates SBA loans, then sells the 70%-75% portion of the loan that's SBA guaranteed for an immediate premium that ranges from 106% to 120% of the face value of the loan.
It uses the unguaranteed portion as backing for a bond issue that it then sells to investors. NEWT then gets paid a fee for collecting the payments on the SBA loans. This provides a very reliable flow of cash to Newtek both in quick cash up front and reliable payments afterward.
This year, with COVID-19, NEWT saw new SBA loan activity slow down as they suspended originations until June. Fortunately, a similar opportunity cropped up that NEWT took full advantage of.
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The PPP program has been great for NEWT. It came along just when the flow from regular SBA loans was drying up. The best part is that the PPP loans are 100% guaranteed, with the loans generally designed to be forgiven.
NEWT did a better job taking advantage of this program than any of their peers and it led to outperformance in Q2 and Q3. The latest stimulus $9 billion stimulus bill includes some $284 million in PPP funding allowing qualified businesses to take out a second loan.
That's great news for the company; NEWT will see profits soar from the program a second time even as their core business is recovering. We fully expect much more PPP funding in the year 2021.
Insiders own approximately 1.5 million NEWT shares out of a total of 21.8 million or 6.87%. This is fairly high and helps to align management with shareholder interest.
This year CEO Barry Sloane has added some 15,500 shares to bring his total to 1,055,094 shares. Combined, management has added just over 24,000 shares of NEWT. By investing today, you can lock in a yield of more than 11% and enjoy riding along with NEWTs growth.
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