Value stocks -- those that are trading below their intrinsic value or earnings potential -- have enjoyed a resurgence recently, outperforming many growth stocks that saw their valuations soar over the past year. Typically, recessions and market corrections create good buying opportunities for value stocks, and the period coming out of them is when they outperform.
One stock in particular performed great last year during the pandemic and has continued that positive momentum in 2021, and it's still undervalued: Mr. Cooper Group (COOP 1.36%). Eventually the market will recognize its strength, but you can get in now while it's still a value.
Meet Mr. Cooper
Mr. Cooper Group is one of the largest mortgage loan servicing companies in the United States, working primarily on single-family residential loans. As a mortgage loan servicer, it conducts various services on the underlying mortgages, like collecting and handling payments, reporting, loan modifications, customer service, and other duties. It is the largest non-bank mortgage servicer in the U.S. and the fourth-largest overall, working with about 3.5 million customers and servicing about $646 billion in mortgages.
The company, which was known as Nationstar Mortgage until 2017, is also a mortgage lender, the 15th-largest in terms of mortgage loan originations.
The third and smallest part of its business is called Xome, which provides real estate technology solutions for mortgage servicers and lenders, like asset management, title services, valuations, recapture, data and analytics, and field services.
In the first quarter, the company generated $1.3 billion in revenue, a 33% increase over the same period the year before, while net income surged 194% to $556 million, or $6.22 per share. It also generated a record $362 million in operating income. Mortgage servicing revenue, which represents about 45% of overall revenue, saw a huge jump to $576 million, up from $190 million in the fourth quarter of 2020. Loan originations, the largest portion of its revenue, generated $595 million in the quarter, and had $25.1 billion in funded volume, also a record.
At Monday's prices, this stock was up 8% in 2021, which follows a year in 2020 when the price surged 148%, driven primarily by gains in mortgage refinancings stemming from the record low interest rates.
Mr. Cooper should continue to increase earnings throughout 2021, as the outlook for residential housing is good. The focus may shift from refinancings to new home originations, but it should continue to be fairly robust, which is good for Mr. Cooper.
Also, the company has made some recent strategic moves that should bolster its leadership in mortgage servicing and growth in originations. First, it sold off Title365, its title insurance and settlement services company, for $500 million. This will improve the company's liquidity and allow the company to invest in its core businesses of mortgage servicing and originations. Plus, its Xome business, which supports lenders and servicers, offers title services.
Mr. Cooper also struck a deal with Alphabet's Google Cloud to develop an automated, digital mortgage servicing platform powered by artificial intelligence and machine learning, as well as data analytics. This platform will create an easier and more personalized process for customers to transmit, review, and sign loan documents.
It's the latest example of a company that has gained an edge through investing in technology to improve efficiency, cut costs, and increase margins. It currently has an excellent return on tangible common equity of 44%, which is a sign of its efficiency, and an operating margin of 51.8%, which is profit made on every dollar of sales. Just two years ago, this margin was in the single digits, but the commitment to expense reductions combined with operational efficiencies gained through strategic technology investments have resulted in steady margin increases.
Analysts are bullish on Mr. Cooper, with a median price target of $41 per share, about a 23% increase. Yet despite its performance, the stock remains undervalued, with a price-to-earnings ratio of just 3, a price-to-sales ratio of 0.85, and a price-to-book ratio just under 1. All of these metrics reflect a stock price that's a bargain in relation to its earnings power. Jay Bray, Mr. Cooper's chairman and CEO, said it best on the first-quarter earnings call: "I think our stock is materially undervalued when you think of the earnings power of this business." He's not wrong.