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2 Top Stocks You Can Buy on Sale

By Brent Nyitray, CFA – Updated Sep 28, 2021 at 4:06PM

Key Points

  • Mortgage originators are out of favor due to fears of higher rates.
  • Rocket's app gives it a cost advantage over its competition.
  • United Wholesale's technology make it an easy company for brokers to deal with.

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Mortgage originators are getting a beatdown from the market, but these two stand tall.

With the stock market trading at record highs, finding pockets of value is difficult. Nearly every company is priced for perfection. But investors still find at least one sector unappetizing: mortgage origination, the business of making it possible for people to buy a home. Two of the biggest lenders in the space-Rocket (RKT -2.71%) and UWM Holdings (UWMC 0.65%) have characteristics that make them leaders in their respective markets. These stocks are the biggest in their respective spaces, giving them the best chance to dominate the market going forward. 

Picture of a mortgage document

Image source: Getty Images.

Mortgage Originators help people finance a home

Mortgage originators assemble the loan for a prospective homebuyer or homeowner. Unlike banks, which view mortgages as investments, companies like Rocket and UWM Holdings generally do not hold on to the loans they make. They'll make a loan, sell it for more than the amount they lent out -- since whoever buys the loan from them will enjoy a steady flow of additional interest payments from the borrower for years to come -- and pocket both that profit, and the $2,000 or so in fees they've charged the borrower for making the loan in the first place. 

This way, mortgage originators make their money up front; banks, in contrast, make their money over the long term by collecting the borrower's payments. That means mortgage originators thrive when lots of people are taking out new loans or refinancing old ones. Right now, investors are fretting about rising interest rates, which make loans more expensive and less appealing to borrowers. The market's worried that mortgage originators will suffer if fewer people take out new loans or refinance their existing ones. 

But even in a tougher environment, Rocket and UWM Holdings (aka United Wholesale) could still hold up. They've made massive technological investments into their businesses that make it a lot easier and less expensive for them to issue -- and profit from -- new loans. The two companies have some overlap, but Rocket is known primarily for its model of lending direct to consumers using its app. UWM Holdings interacts with loan brokers, not individual borrowers. 

Rocket's app allows it to avoid one of the biggest expenses originators pay

Rocket is best known for its tag line "push button, get mortgage." Its secret sauce is its app, which makes it extremely easy for consumers to get a mortgage. While the app is highly convenient for the borrower, it also gives the company a big cost advantage over other mortgage originators. Mortgage originators spend a lot of money -- anywhere from 0.5% to 1.75% of the loan amount -- paying the loan officers who work for them to find customers and put loans together. On a typical $300,000 mortgage, that can add up to $5,250. When its customers interact with an app instead of a person, Rocket doesn't have to pay those fees, which helps it earn more profit per loan than its competitors. 

In 2020, Rocket's pre-tax profit as a percentage of its volume was just under 3%, head and shoulders above any of the other publicly traded mortgage bankers. Rocket is investing heavily in related businesses such as title insurance, car loans, and real estate sales. These other lines of business will help smooth out the feast-or-famine nature of the mortgage business, which otherwise keeps stocks in this sector trading at low multiples. Rocket is trading at just under 8 times expected 2021 earnings per share. Rocket gets a premium multiple compared to its competitors, which are trading in the mid-single-digits, but its technology warrants that. That said, if interest rates rise, its earnings in 2022 may turn out to be lower than 2021. 

United Wholesale's technology is about serving brokers

United Wholesale has a different tag line: "Brokers are better." This refers to mortgage brokers -- basically, loan officers who have the ability to work with multiple lenders to find each borrower the best product at the best price. Very few lenders excel at offering the best rates for every product, so a broker who knows which lenders prefer certain types of loans can usually help borrowers find pretty good deals. 

United Wholesale's secret sauce is its technology, which gives the loan broker great visibility into how the loan is being assembled. Since the broker doesn't actually put together the loan (United Wholesale does that), the broker is free to spend that time looking for additional customers, giving United Wholesale another advantage. Its technology also means the company can originate loans a lot more cheaply than most rivals, which translates into high profit margins as well. Last year, United Wholesale's profit per loan was 1.85%, which was lower than Rocket, but higher than the other big publicly traded mortgage bankers. United Wholesale trades at 10 times expected 2021 earnings per share, but it's expected to grow earnings in 2022. 

The low multiples for these two companies reflect the highly cyclical nature of the mortgage banking market. That said, you can buy two of the highest-quality companies in the business for a high-single-digit multiple. Their technological investments are difficult to replicate, and many lenders have been unable to create an app as powerful and popular as Rocket's "push button, get mortgage" approach. As for United Wholesale, brokers like its visibility and low costs, and they appreciate how the company focuses solely on brokers and considers them its customers. These advantages give both companies an edge that rivals can't easily duplicate. Given their durable business models, Rocket and United Wholesale seem likely to retain their positions as two of the top originators in the United States -- which could benefit investors in the long run. 

Brent Nyitray, CFA has no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Rocket Companies Stock Quote
Rocket Companies
RKT
$8.27 (-2.71%) $0.23
UWM Holdings Corporation Stock Quote
UWM Holdings Corporation
UWMC
$4.64 (0.65%) $0.03

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