Stocks to buy

UWM Holdings Is an Undervalued Gem, Reddit Is Right

UWM Holdings (NYSE:UWMC) has been receiving quite a bit of attention on Reddit. Despite the attention from this crowd that took Gamestop (NYSE:GME) to all-time highs, UWMC stock is on the downtrend. The stock has lost about half of its value from its all-time highs.

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It’s been a rough few weeks for special purpose acquisition companies (SPACs) and recently de-SPACed stocks. UWMC stock is no exception.

The root cause of this bearish sentiment is the U.S. Securities and Exchange Commission’s (SEC) recent warning against SPACs, making investors second guess the valuations of these companies. However, I believe that this is a case of throwing the baby out with the bathwater.

Unlike other SPACs that have made deals with speculative firms, UWM is a solid company with a long track record. UWM is the largest wholesale mortgage lender in the United States “with approximately 34% market share of the wholesale mortgage market.”

UWM is a Leader in the Wholesale Mortgage Market

UWM’s 2020 mortgage production of $182.5 billion made it the second-largest residential mortgage lender in the US. In 2020, 4.5% of all residential mortgage loans in the U.S. originated from UWM. The company has been operating since 1986, and has a dominant position in the industry.

UWM got into a bit of controversy recently when it flexed its muscles. The company issued an ultimatum to its broker partners not to do business with Rocket Mortgage and Fairway. The company reasoned that hybrid lenders like Rocket are attempting to circumvent the mortgage broker, and thus cut out the middleman. UWM is making this move to protect the wholesale mortgage channel from what it views to be predatory practices.

This was quite a bold move, as I imagine independent mortgage brokers generally don’t like being told what to do. The move paid off though, as most brokers seemed to have sided with UWM. According to CEO Mat Ishbia, the move has had a positive response, and “out of 12,000 brokers, not even 500, chose to continue partnering with Quicken”. Assuming that this is not challenged by litigation, I believe this is good for the company in the long-term, as it ensures a healthy wholesale market that can compete with direct lenders.

Buy UWMC Stock to Take Advantage of the Hot Housing Market

Not only is UWM a market leader in the industry, it also has been growing at a healthy pace. UWM’s mortgages originated has grown from $9 billion in 2014 to $182.5 billion in 2020. In 2017-2020 alone, the company had origination mortgage CAGR of 89%.

The current ultra-low interest rate environment and the red-hot housing market have also paved the way for UWM to have a blockbuster 2020. In December 2020, Americans’ applications to refinance a home loan were up 105% year over year. This resulted in a blockbuster quarter for the company. In Q4 2020, the company’s loan volume jumped by 71% from $31.9 billion to $54.7 billion. This translated to a net income of $1.37 billion for the quarter, an astonishing 821% increase from the prior year.

Despite the possibility of rising rates, the company is still guiding for a bullish 2021. In Q1 2021 it expects closed loan volume between $52 billion and $57 billion. Now, there is some cyclicality in the mortgage industry that could put pressure on the growth rate of the company’s loan volume. However, I believe that the company can continue along its growth trajectory, despite a slowdown in housing, by grabbing market share from its competitors.

Investor Takeaway

I am amazed that UWMC stock is trading as cheap as it is. At the current stock price, the stock has a forward P/E of 8.61 and has a dividend yield of 5.28%. Now, there is a risk that growth may slow down. However, unless you believe that earnings will decrease dramatically from 2020, it’s hard to see how this stock can be considered too expensive. In the worst case, you are buying a market leader at a fair value. I have a buy rating on UWM.

On the date of publication, Joseph Nograles held a long position in UWMC and GME.