First things first: UWM Holdings (NYSE:UWMC) stock is a meme stock even old-school investors can love. Unlike some of the other meme stocks or Reddit stocks out there, the hype around it isn’t fully out of whack relative to its valuation.
The wholesale mortgage lender (largest in the U.S. by origination) has been doing stellar business as of late, thanks to the home buying and refinancing boom fueled by near-zero interest rates.
Concerns are mounting that this boom has peaked (given that interest rates are on the rise again). Yet, even as shares in this former SPAC (special purpose acquisition company) have pulled back below their $10 per share offering price, a rebound may be just around the corner.
Why? The potential for its results to remain stable. Its strong growth in the past year looks to be slowing down. But, based upon solid projections for 2021 and 2022, shares may be a bargain at today’s prices. Add in its forward dividend yield and there’s reason for this stock slowly crawling back to prior price levels.
The fact that it’s been largely Reddit investors excited about could be a concern. Shares could see some volatility if retail traders exit their positions.
But among the most talked-about stocks out there, this may be one that’s more of an investment than a straight-up gamble.
UWMC Stock and Its Solid Recent Results
As InvestorPlace’s Robert Lakin wrote March 3, it was r/WallStreetBets’ attempt to turn UWM Holdings shares into the next Rocket Companies (NYSE:RKT) that put the lesser-known mortgage wholesaler on the radar of retail investors.
While their attempt to “send it to the moon” via a short squeeze has so far produced mixed results, the short squeeze factor alone isn’t the only reason to be excited in this opportunity. The level of short interest may be moderate at best (around 12% of outstanding float).
But if the company can prove its bears wrong, future better-than-expected results may cause said shorts to cover their positions. This could supplement possible gains in the stock on fundamentals alone.
Speaking of its fundamentals, what about the underlying business of UWMC stock makes it a possible buy? For one, as seen from its full year 2020 results, the housing boom has resulted in blockbuster growth for the mortgage wholesaler. Year-over-year, origination grew 71%. Net income for the quarter ending Dec. 31 hit a staggering $1.37 billion.
However, based on projections it’s clear its 2020 was largely a one-time event. Add in the specter of rising interest rates, and it’s no surprise investors are mixed about this stock. But, while there are concerns to keep in mind, there may be enough in play to send it gradually back towards higher prices.
As Interest Rates Rise, What Lies Ahead?
There’s no getting around the issue of rising interest rates, and its possible negative effect on UWMC stock. Although Reddit investors have been bullish, sentiment overall is lukewarm. That’s why the stock has only seen brief pops rather than a strong upward surge.
Mortgage market analysts may anticipate rates to continue rising through 2021, even as the Federal Reserve remains adamant about maintaining a near-zero interest rate environment. A continued rise could result in 2020’s hot mortgage market cooling down. But that alone doesn’t spell doom for UWMC stock.
As seen from last September’s investor presentation, stable results are projected this year and the next. Net income for each year is expected to around $1.7 billion. Sure, this means that the heavy growth seen last year is slowing down fast. Even so, compared to its current market capitalization (around $16.6 billion), valuation looks more than reasonable here.
Combined with its 5% dividend yield, shares may have room to bounce back, even as investors worry about where interest rates are headed over the next two years. That’s not to say UWMC stock could soon rally back to its $14.38-per-share high. But a gradual move back above $10 per share may be attainable.
Bottom Line: Tread Carefully for Now
There’s more than Reddit hype behind UWM Holdings. Thriving during the unexpectedly strong housing/mortgage market of 2020, growth may not be on the menu in 2021. Interest rates could rise and the company’s revenue and earnings growth could slow down considerably.
But comparing its projected earnings against today’s valuation, there may be room for the stock to make a gradual recovery. Factors like its moderately high short interest and the possibility the Reddit gives it another go could also help boost the stock in the short-term.
However, while there’s plenty to send the stock higher rather than lower, so tread carefully. A sharper-than-expected cool-down in the mortgage market could do serious damage to UWMC stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.