PennyMac Looks Iffy Despite Upgrades
NEW YORK ( TheStreet) -- PennyMac Financial Services
PennyMac shares hit a multi-week high of $18.69 on March 24 but fell sharply in subsequent days after the company announced that Fidelity Investments Charitable Gift Fund would sell 6.1 million shares, equal to 8% of the total outstanding. Fidelity acquired the shares at the time of PennyMac's initial public offering, according to a report from Jefferies analyst Daniel Furtado Tuesday.
Furtado upgraded PennyMac to "buy" from "hold" in his write-up, arguing the company will be a "long-term beneficiary [from] US residential mortgage reform." His upgrade follows one from Wells Fargo analyst Joel Houck Friday.
PennyMac shares, which hit a recent low of $15.80 March 27 were up 3.45% to $17.21 Tuesday morning.
But the potential for further dilution is still very real. Even after the sale by Fidelity, Furtado's report notes that "only about 25% of authorized shares currently float with three large investors holding concentrated positions."
On the other hand, Furtado's argument for recommending PennyMac seems a bit thin. His report states that PennyMac will be a beneficiary as "the mortgage market evolves away from heavy government intervention."
But that transition will inevitably take longer than everyone thinks. Government moves at a snail's pace even when the appetite for reform is great. But when it comes to mortgage reform, no politician is eager to risk stalling or potentially crashing the fragile recovery by removing government support.
Furtado further argues PennyMac has an advantage over other non-bank servicers such as Ocwen Financial Corp.
While this may be true to an extent, it isn't a compelling reason to dive into PennyMac shares. Ocwen is adept at enlisting support from consumer advocates , which will likely help soften the ire of regulators, and Nationstar has undoubtedly studied Ocwen's moves pretty closely. At the same time, PennyMac Chairman and CEO Stanford Kurland always has the potential to become a lightning rod for industry critics since the former Countrywide Financial President is now profiting handsomely from a mess he in some respects helped create. Further, PennyMac is a shadow bank, and while shadow banks benefit from lighter regulation as a result of not being banks, it seems hardly a month goes by without some regulator warning about the risks from shadow banks. Also, Ocwen and Nationstar originate their own mortgages too, and plans by those companies to do more of their own mortgage origination will create competition for PennyMac.