Sometimes the share-buying and share-selling behavior of a company's executive team can offer clues to the public about how those insiders view the value of the stock. If executives are buying, that is typically a bullish sign. When they sell, it's often interpreted as a bearish signal (or at least, not a bullish one).
Recently, Mat Ishbia, CEO of UWM Holdings (NYSE:UWMC), the parent of mortgage giant United Wholesale Mortgage, canceled a previously announced stock offering. The story offers some interesting insight into how companies view their stock prices, and it also speaks to the effects of stock indexing.
The size of your float matters
On Nov. 18, UWM announced that it was canceling a previously announced secondary stock offering. The mortgage specialist went public in January via a merger with a special purpose acquisition company (SPAC), however, the vast majority of its shares are still held by the company, not circulating in the market, which gives it what's called a small float.
Before the late 1990s, market-cap-weighted indexes like the S&P 500 didn't adjust for the size of a company's float. Back then, some companies would only issue a relatively small number of shares, and that scarcity made them susceptible to short squeezes. Management actually loved this because the purchases of a few momentum investors could lift a company's market cap in a big way.
One common tactic of hedge funds at the time was to buy a company's stock upon the announcement that it was going to be added to an index. The stock would rocket as investors calculated how many shares the mutual funds tied to that index would need to buy in order to properly track it. The hedge funds would then flip their shares to the index funds on the day the company officially joined the index. It was easy money for a while. Eventually, the indexes made rule adjustments to prevent this from occurring.
UWM pulls its planned stock offering
UWM was interested in selling some shares in order to increase the size of the float and make the stock more appealing to institutional investors. Big financial institutions require a stock to have a certain level of liquidity in order for them to feel comfortable owning it. In addition, a larger float makes a company more attractive to the owners of the stock indexes like S&P Global. As Ishbia said in the Nov. 18 press release:
"As the principal owner of SFS [the entity holding UWM Corp stock], I was willing to sell a percentage of our ownership in UWM at less than what I think to be fair value because we were advised that increased float in the public market would be beneficial for the UWMC shareholders, including its largest shareholder, SFS ... Unfortunately, while there was more than enough demand from potential investors, the overall market conditions were such that the prices offered were not at levels that I will entertain."
In sum, Ishbia was saying that while he's willing to sell stock in order to increase the float, he thought it was trading at too cheap a level to sell. Evidently, the market agreed. The share price surged upward by 23% following the announcement.
An unusual business model for the mortgage industry
United Wholesale operates under a different business model than competitors such as Rocket (NYSE:RKT) or PennyMac Financial Services (NYSE:PFSI). Rocket is a classic retail lender, making loans directly to consumers. PennyMac is a classic correspondent lender, which buys completed loans from smaller lenders. United Wholesale uses the broker model: Its customers are mortgage brokers, who find loans and then has UWM assemble and fund them. UWM's motto is "Brokers Are Better" -- and its model and technological advantages do allow it to originate loans at lower costs.
Brokers accounted for a much bigger percentage of the mortgage market before the financial crisis in 2008. UWM is betting that they will regain much of that market share again. Wall Street seems to agree: UWM is one of the few mortgage originators that analysts are forecasting will grow earnings per share in 2022. Wall Street predicts that its EPS will increase by almost 10% next year, while it expects Rocket's EPS will fall by 33% and PennyMac's will decline by 18%.
Much will depend on interest rates
Last year was one of the best for the mortgage industry since the pre-bubble days. Companies took advantage of the great times to go public, and since then, the mortgage originators have underperformed the indices massively. This is due to investor fears that interest rates will rise by a lot next year as the Fed tightens to quell inflationary pressures. UWM Holdings has been roughed up since its IPO, as have other leaders like Rocket. Mortgage origination companies are highly cyclical, and that is reflected in the low multiples they generally garner.
The fortunes of mortgage originators will depend on where interest rates go next year. With the Federal Reserve poised to reduce its purchases of mortgage-backed securities and raise the federal funds rate next year, loan volumes are expected to shrink as refinancing opportunities dry up. United Wholesale and Rocket trade at premium multiples relative to the rest of the industry. However, their technological advantages warrant those higher multiples. United Wholesale also pays a dividend that at today's share prices yields 5.8%, which makes the stock worth a look for income investors. Ishbia thinks the stock is cheap. Perhaps it is.