Although the stock market has been more volatile, the sell-off is also creating interesting new buying opportunities.
And I see one in a stock we've traded profitably before: PennyMac Mortgage Investment Trust (PMT), a specialty finance company organized as a real estate investment trust (REIT).
As a REIT, PennyMac avoids the corporate income tax and must pay out at least 90% of its net cash flow to shareholders. In this case, the yield is a whopping 10.5%.
PennyMac's mission is to keep borrowers in their homes and provide investors with attractive returns. The firm has an experienced team that brings a high level of analytic discipline to the process of investing in home loans.
In particular, PennyMac does not invest in a mortgage until it confirms the borrower's willingness and ability to pay his or her mortgage.
PennyMac is good at what it does. In the most recent quarter, earnings soared 180% on a 157% increase in revenue. Operating margins top 63%. And management is earning a solid 19% return on equity.
Yet, the recent uptick in interest rates has sent a lot of high-dividend stocks reeling, and PennyMac is no exception. From a 52-week high of nearly $29, the stock is off roughly 30%.
I think that pullback spells opportunity. For one thing, newly rising home prices protect mortgage holders like PennyMac. For another, PMT has smashed expectations in each of the last four quarters, beating consensus estimates by 127%, 232%, 192% and 176%.
PennyMac is likely to keep outperforming. And I'm not the only one who thinks so. Chairman and CEO Stanford Kurland has been piling into the stock lately. For the last couple of weeks, he has purchased $1 million-worth of the stock -- and now owns 428,000 shares.
Kurland clearly likes the outlook for PennyMac's business -- and recognizes value when he sees it. PennyMac sells at book value and for only six times trailing earnings. So pick up PennyMac Mortgage Trust at market. And place a protective stop at $17.
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