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Why Shares of UWM Holdings Are Rising Today?

By Bram Berkowitz - May 17, 2021 at 10:47AM

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It's unclear why traders are bidding up this wholesale mortgage lender's stock. But one of the possible reasons should induce wariness in most investors.

What happened

Shares of wholesale mortgage lender UWM Holdings (UWMC 0.25%) rose by as much as 15% Monday morning for no obvious reason. As of 11:40 a.m. EST, that rise had moderated somewhat back to a gain of about 7.8%.

So what

UWM stock has been on an upward trend for most of the last week. On one hand, on the company's recent earnings call, management said mortgage originations in the second quarter are expected to exceed those generated in the first quarter. The company also announced a $300 million stock buyback program that will be in place for the next two years.

But more recently, analysts have cut their earnings estimates for UWM, suggesting previous forecasts had been too favorable.

Line moving upward on chart.

Image source: Getty Images.

As a wholesale mortgage lender, UWM provides financing to third parties such as independent mortgage brokers, which go out and find the retail borrowers. But after an explosive year for mortgages in 2020, some think the mortgage market may have peaked, especially as inflation concerns could lead to the Fed beginning to boost its benchmark interest rates sooner than had been expected.

Now what

There are a few possible causes that might explain the recent appreciation of UWM's stock. While the prevailing outlook for the mortgage market appears less than superb, some investors could believe those concerns are overblown, and that there will be a few good years of activity before interest rates increase. They could also foresee a strong period ahead for the purchase mortgage market.

Another possibility is that the Reddit group WallStreetBets is once again targeting this stock -- as it has in the past -- because there is short interest on more than 13% of the company's float. I personally would stay away from the stock right now, given the company's outlook and the uncertainty about what's driving the price up right now. 

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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