UWMC’s Valuation Looks Full, Better to Sit on the Sidelines

United Wholesale Mortgage’s (UWMC) stock price has recovered significantly in the past month or so after trading at a discount for a few months. What is UWMC's stock price forecast and can it run up more?

United Wholesale Mortgage is a solid company with nearly a 34 percent market share of the wholesale mortgage market. It's the second-largest residential mortgage lender in the U.S. Its origination mortgages have grown at a CAGR of 89 percent from 2017–2020.

According to the consensus compiled by Market Beat, UWMC has six analysts covering it. The analyst ratings are equally split between buy and hold. The 12-month forward target price for the stock is $10.17, which implies a potential upside of 3.64 percent.

On June 14, Wedbush analyst Henry Coffey downgraded the stock to neutral from outperform given the recent rise in its stock price. While he likes the company’s prospects including his expectation of UMC garnering additional market share, he moved to the sidelines given a huge up move in the price.

On June 2, Credit Suisse downgraded UWMC to neutral from outperform. The analyst thinks that the risk-reward is more balanced following the recent recovery in the stock.

UWMC went public through a reverse merger with SPAC Gores Holdings IV in January. Not long after going public, UWMC started trading at a discount to the listing price of the SPAC ($10). Part of the decline was due to the SEC’s warning against SPACs. It hit a low of $6.65 on May 10. Since then, the stock has recovered by nearly 48 percent. Most of the rise in the stock is due to the positive social media chatter around it.

The Reddit subgroup WallStreetBets has been discussing the stock in a positive light. Like many meme stocks, the short interest in UWMC is high at 22 percent. Therefore, social media users are also seeing it as a short-squeeze candidate. Apart from the high short interest, users have noted the fundamental value in the stock and potentially positive catalysts.

The company has a few positive catalysts on the horizon, including potential Russell inclusion, dividends in July, and a stock buyback. In May, UWMC’s CEO announced that $300 million worth of shares will be bought back over the next 24 months. Its mortgage origination has seen strong growth lately. However, the continuation of this trend is in doubt.

While interest rates are low currently, higher inflation expectations could put upward pressure on rates, which would be negative for UWMC and its peers. These companies operate in a cyclical business and their fortunes are tied to the interest rate environment. The current cyclicality could put downward pressure on its loan volumes.

UWMC is a solid company with strong fundamentals. However, the current cycle could bring a certain downside to not only the company but also its peers in this space. After the recent rally in UWMC's stock price, most of the positives and catalysts seem to have already been priced into it. Therefore, at the current NTM PE multiple of 21x, compared to just 6.5x at the end of March, its valuation looks more or less full. The current balanced risk-reward equation doesn’t leave much upside for investors.