Mortgage stocks are not a common pick for investors in the rising rate environment. Still, Lido Advisors’ Gina Sanchez says Mr Cooper Group Inc (NASDAQ: COOP) is an exception here.
Highlights from Sanchez’ interview on CNBC
The Texas-headquartered small-cap company that plays in the residential loan market is roughly flat for the year. Explaining why she likes the stock, Sanchez said on CNBC’s “The Exchange”:
Mortgage dealer does not fall into the natural category [for rising interest rates]. However, Mr Cooper, most of their income is coming from mortgage servicing, which does quite well when interest rates rise. So, it’s a natural hedge against this interest rate rise.
Also on Friday, the U.S. Bureau of Labour Statistics said inflation accelerated again and hit a new forty-year high of 8.6% in May. The Dow Jones estimate was for an 8.3% YoY increase.
COOP generates 71% of income from servicing
Interestingly, Sanchez is convinced the Nasdaq-listed company will continue to perform well even if the housing market gets worse, thanks to its oversized exposure to mortgage servicing.
Even if mortgages dry up, servicing doesn’t stop. Over 40% of their revenue stream is mortgage servicing. More than 71% of their income is coming from that space. So, they are more amped to that rate hike hedging scenario.
In April, Mr Cooper reported its financial results for the first quarter that topped Wall Street estimates by a significant margin. Wall Street, on average, expects COOP to be a $57 stock.
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