It has been a nerve-wracking past few months for investors as we've seen volatility due to overvalued growth stocks, inflation, supply chain issues, COVID-19 variants, and the expectation of rising interest rates, to name a few of the catalysts. Now the world faces the horrible consequences of Russia invading Ukraine, which obviously has impacts well beyond the market.
As a long-term investor, you know that short-term volatility is a fact of life, and selling good stocks at the wrong time just locks in your losses. You also know it's a good time to buy, as many great companies are available at low valuations. But amid the sea of red on the market, there is one great stock flashing green that is still a bargain, Mr. Cooper Group (COOP 2.53%).
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Mr. Cooper: Beating the market, up 18% year to date
No, Mr. Cooper is not a character on a 1990s sitcom; it is one of the largest mortgage loan-servicing companies in the country and the largest nonbank mortgage servicer. As a mortgage servicer, Mr. Cooper oversees the administrative aspects of a loan -- including collecting payments, escrow, reporting, loan modifications, and other tasks -- for the life of the loan until it is paid off.
The company has about 3.6 million customers and services about $710 billion in loans. It makes money off fees charged to service each loan.
Mr. Cooper is also a mortgage lender, the 15th largest in the U.S. It generates about half of its revenue from servicing and half from lending.
Unlike most stocks on the Nasdaq, it has had a great year, with the stock price up 22% in 2022 and 61% over the past year as of Feb. 28.
One of the catalysts was the growth in its mortgage-servicing portfolio, which increased 17% in 2021 to $710 billion. In the fourth quarter, the company beat analysts' estimates with revenue of $625 million and earnings per share of $2.28.
It finished the year with a return on capital employed (ROCE) of 19%, which is a measure of profitability and efficiency. This percentage, and a 51% operating margin and a 50% return on equity, indicate a company that is efficiently generating revenue.
A new partnership should add scale, revenue
Mr. Cooper also got a boost from a partnership it announced in February with Sagent, in which Sagent will integrate Mr. Cooper's mortgage-servicing platform into a cloud-native core. It will then license the cloud-based servicing platform to Mr. Cooper and other servicers, including Sagent's customer base of banks and mortgage lenders.
Sagent will start marketing the platform to other mortgage companies in 2023. In turn, Mr. Cooper gets an equity stake in Sagent.
This will create the first cloud-native, homeowner-first servicing platform, Mr. Cooper Chief Executive Officer Jay Bray said on the fourth-quarter earnings call. It will also bring the platform to a much wider universe.
On the earnings call, Bray said:
It's going to force every single operator to migrate their system to the cloud or face significant competitive disadvantages. For Mr. Cooper, this new platform will drive efficiencies, both in terms of operating costs and ongoing cost of maintaining and upgrading the technology. This is a very significant development for the industry and for Mr. Cooper.
The company expects a pretax gain of about $225 million related to the equity stake in the first quarter.
Rising interest rates are good news for Mr. Cooper
With the Federal Reserve likely to raise interest rates several times this year starting in March, Mr. Cooper should benefit significantly. It helps in two ways. One, higher interest rates raise the overall value of the companyʻs assets, which increases its book value. As Bray told CNBC in February, "In our servicing business, with rising rates, the value of our assets could go up by $400 million." He estimated 15%-plus growth in the servicing portfolio in 2022.
Also, higher interest rates reduce the number of mortgage refinancings, which in turn creates a longer life span for the mortgage and Mr. Cooperʻs servicing rights, which translates to higher revenue.
Another good thing about this stock is its valuation. The shares trade at just three times earnings with a price-to-book value of 1.1, which puts it in value territory. It is currently trading at about $49 per share, with a consensus analyst estimate of $55 over the next 12 months.
All things considered, Mr. Cooper is a pretty good bargain with some nice upside potential.
