A meme stock with huge earnings and strong fundamentals? Pretty rare, right? Well, let me introduce you to UWM Holdings (NYSE:UWMC). UWMC stock is the rare one where both Reddit traders and value investors can unite. The shares are cheap, the business is booming and social media is all over the stock.
The market is finally catching onto these attributes. Up until last month, UWMC stock looked like a special purpose acquisition company (SPAC) that had fallen on hard times. Shares crashed through the $10 SPAC floor and reached as low as $6.18 at one point. That’s a dispiriting welcome to the public markets.
Yet, even as shares plunged, the underlying business continued to deliver huge operating results.
This created a classic opportunity to profit from a short-term market miscalculation. That, plus some social media magic, has led to a quick reversal for UWMC stock. Shares retook the key $10 level on massive volume recently. And, with both momentum and fundamentals aligned and pointing upward, the future looks bright for UWM Holdings.
Dividend Boost for UWMC Stock
Analysts forecast that UWM will earn roughly $1.00 per share of earnings this year. Thus, with a $10 stock price, this means that UWMC stock is trading at 10x earnings. For 2022, analysts see earnings jumping to $1.14. And then, in 2023, analysts forecast earnings surging to $1.61. This would put the stock at an incredible 6x 2023 earnings.
How will these earnings benefit shareholders? Right now, the company pays a modest dividend of 20 cents per share. That amounts to a 2% annual yield, which is fine, though nothing special. Given the company’s huge earnings, however, it wouldn’t be surprising if the company substantially boosts the dividend going forward.
Also, UWM could afford a large share buyback. To that end, it already announced a $300 million program over the next 24 months. And given its windfall earnings, it could probably do even more. Particularly if the mortgage business slows and UWM pares back its investments in growth, it would open the door for an even larger share buyback or dividend program.
What the Market Is Missing
So why is the stock so cheap, and in particular, why’d it go down so dramatically earlier this year? There are two big reasons for that. One is UWMC’s chief rival, Rocket Companies (NYSE:RKT).
Rocket is the rebranded Quicken Loans, and is a huge mortgage business. It also has achieved meme stock status as well. The name is particularly compelling on social media, given the popularity of the rocket emoji. There’s been a great deal of debate around whether Rocket or UWM is the more appealing stock and operating business. My take is that there’s plenty of opportunity for both; I’m bullish on Rocket as well. However, some partisans support Rocket aggressively and criticize UWM.
There’s also the question of how long the mortgage boom will last. All the money printing and fiscal stimulus has led to a good deal of inflationary pressure. Markets are reacting. It’s particularly evident in interest rates, which have advanced sharply over the past year. Higher interest rates reduce the appeal of mortgages. That’s particularly true for refinancings. A mortgage provider like UWM earns significant money on refinancings, and thus could see a hit to earnings if interest rates keep rising.
The thing many people are missing is that a refinance slowdown would hurt Rocket more than UWM. UWM is more concentrated in new purchase mortgages instead of refinancings of existing mortgages. Thus, in the event that things decelerate, UWM should have a more graceful earnings trajectory going forward.
UWMC Stock Verdict
I’ve been bullish on UWMC stock before. Since then, UWMC stock has rallied sharply. However, little has changed going forward. Maybe UWMC stock is just cheap now instead of dirt cheap. But that’s not a big deal in the bigger picture.
You can easily justify a $15 price, or even higher, for UWM Holdings based on its current earnings power. Throw in the meme stock status and this is an easy hold here. Who knows how far the social media enthusiasm will lift shares in the short run.
The bigger point, however, is that there’s a solid and highly-profitable underlying business here that is still selling at an attractive valuation. If you want to trade a meme stock with limited downside risk, UWMC stock is a compelling option.
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.