UWM Holdings (NYSE:UWMC) is a most interesting company. UWM, which is short for United Wholesale Mortgage, rose to prominence earlier this year thanks to the r/WallStreetBets excitement. Traders bid it up in hopes of a huge short squeeze. This did not happen. In fact, UWMC stock has crashed. However, unlike many Reddit stocks, this one appears to be a fundamentally strong company trading at a compelling valuation.
To that end, analysts see UWM earning $1.45 per share this year. Given that UWMC stock trades for just $7.50 per share, this works out to a knockdown P/E ratio of just 5.
By contrast, a normal market multiple is historically closer to 15 and has moved closer to 20 with the recent bull market.
Sometimes a low P/E ratio is deceptive because the underlying business is rapidly disappearing. Think of regional shopping malls in recent years. Or a biotech company whose only drug is about to lose patent protection next year. But UWM Holdings doesn’t have that problem either.
It’s a mortgage lender, and there’s no reason why demand for those services is set to dry up anytime soon. So why hasn’t UWMC stock worked, and what will change that in the future?
UWMC Stock: The Value Pitch
As noted in the introduction, UWMC stock is trading for just a smidge over 5x earnings. Analysts forecast similar earnings for the company in 2022 and 2023 as well. A 5x P/E ratio means that a company is earning back fully 20% of its market capitalization in net income every year. That is, simply put, incredible.
Bears would push back that UWM is earning unusual profits right now. Head back to 2019, for example, and UWM earned far less than it is today. If 2019 levels of profitability return, the stock would be at closer to 20x earnings.
That’s not horrendous, but it’s not a steal either. Question is, will the post Covid-19 housing boom end almost immediately, or could it run for a while?
There’s a reasonable argument that too few Americans have bought homes in recent years. A combination of factors such as a weak job market, demographics, and a hangover from the 2008 housing crisis kept younger families from buying their own places. Covid-19, however, changed the equation.
Now families have realized the importance of owning their own property and sprucing it up just in case they ever get stuck at home again. The combination of a rapidly rising economy and the trend towards working and learning from home should power stronger housing demand for at least several years.
That, in turn, should allow UWMC stock to earn its boom-era profits for a reasonable period. By the time its business returns to more normal levels, there is a good chance shareholders will already have been well compensated by generous dividends and share buybacks.
UWM: Advantages Versus Rocket
So the stock is cheap. That’s good news just by itself. But what really elevates the case for UWMC stock to the next level? For one, compare it with Rocket (NYSE:RKT).
Rocket is popular with traders, as it is also a meme stock and is in the same industry. There was no shortage of rocket emojis on WallStreetBets when RKT stock doubled in the span of a week earlier this year.
Aside from the better name, however, Rocket comes up short compared to UWMC stock. That’s because, according to UWM bulls, it can close mortgage loans much faster than Rocket.
In a normal housing market, that might not make a big difference. Right now, however, housing is extremely hot. Many homes are selling in bidding wars. Sellers have their choice of which deal to take. Getting access to a loan quickly is pivotal for potential homeowners in this market.
Also, there’s another key element. Rocket has a stronger market position in refinancing. Meanwhile, UWM has a stronghold on originations for new home loans. Right now, UWM has the favorable position of the two. For one, the fees on new mortgages tend to be higher than on refinancing transactions.
Additionally, if interest rates continue to rise, it will crush demand for refinancings. After all, what’s the point of a refi if the new interest rate is higher than the old one? However, given how hot the housing market is, it seems demand for new home loans will continue for quite a while.
UWMC Stock Verdict
It’s tempting to think anything getting hyped up on Reddit must be a risky investment. The members there certainly discuss a lot of boom and bust stock ideas. However, UWMC stock is the exception. It’s a fine business that is now trading at a downright compelling valuation after its recent sell-off.
There are risks of course. Credit quality is a concern, as anyone who remembers 2008 can tell you. The current housing boom will eventually slow down, hurting loan volumes. And rising interest rates could stifle the market for refinancing deals as well. You can come up with some headwinds here if you try.
But at the end of the day, UWMC stock is trading at 5x earnings. There are some real possibilities to give shares a boost in the short-term as well.
For example, given how new UWMC stock is, it isn’t in all major exchange-traded funds (ETFs) yet. Over time, more indexes and funds should add UWMC stock to their portfolios, causing increasing buying activity in the stock. Add it all up, and if you buy just one Reddit stock in the near future, there’s a good case for making UWMC stock the selection.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.