While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of PennyMac Financial Services (NYSE:PFSI) and Nationstar Mortgage Holdings (NYSE:NSM) both sank about 3% today after Wells Fargo downgraded the pair of loan servicers from outperform to market perform.
So what: Along with the downgrades, analyst Joel Houck lowered his valuation range on PennyMac to $17-$19 (from $19-$21) and on Nationstar to $49-$56 (from $54-$62), suggesting that both companies are pretty fairly valued at the moment. While value investors might be attracted to the slide in loan service stocks over the past month, Houck believes the sector's upside remains limited given the interest rate headwinds working against it.
Now what: Wells Fargo doesn't expect mortgage volume to pick up anytime soon. "The rise in the primary rate for a 30yr conventional mortgage over the past several months from, 3.50% to 4.50%, has resulted in slower overall mortgage activity which we believe will extend into 2014," noted the firm. "We believe this could cause a deceleration in origination volumes for a number of servicers under our coverage universe."
Of course, with PennyMac and Nationstar now well off their respective 52-week highs, patient investors might want to scour the sector for attractive long-term opportunities.
Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.