I know only too well the thrill of finding an exciting small-cap stock set to soar.
Indeed, we regularly talk about how fast-growing stocks can greatly improve your fortune.
Home LoansBut there’s a flip side to that story. You can also find plenty of treasure in what many might see as a “plain vanilla” sector – provided that company is using high tech to shake things up.
Just take a look at the U.S. home-loan market…
Right now, it generates more than $1 trillion in volume a year.
And with home sales returning to prerecession levels, the staid and complex market for mortgages is ripe for disruption – and big gains for those who know where to look.
That’s why today we’re using the five “rules” laid out in Your Tech Blueprint to turn up a great tech-centric play on this profitable dynamic.
One that will double your money in three years…
Let’s get going…
When Crisis Leads to Complications
I have a deep personal interest in the banking and mortgage markets. That’s probably because my honors economic degree from the University of Missouri-Columbia includes an emphasis on money and banking.
I later served as a senior industry analyst for the American Banker newspaper, the bible of the industry. There, I frequently wrote about how the industry was adopting new technologies.
As part of that role, I spoke with the top commercial and mortgage bankers in and around the Pacific Coast. Even back then, one of the top complaints I heard focused on the cost of writing regulated home loans.
Following the 2007-’08 financial crisis, which was brought on by subprime lenders, that process has gotten even more complicated. The series of recent laws, rules, and regulations designed to shore up the banking industry that came out during the Great Recession worked in some ways… but were utter failures in others.
In fact, according to the Mortgage Bankers Association, total loan production costs increased from $3,416 in 2007 to $7,120 last year. That’s a little more than double in just eight years.
To me, that means a firm that can offer these lenders a tech solution that lowers their costs and improves their loan process faces a lot of growth.
Enter Ellie Mae Inc. (NYSE: ELLI)…
The company operates a loan origination network – housed on The Cloud – that connects some 206,000 real estate professionals and lenders.
This is a company with a big vision. Ellie Mae says it wants to automate as much of the loan process as it possibly can.
The firm’s main portal for success is Encompass, a web-based platform with which clients can manage nearly every aspect of the loan process – from loan origination and regulatory compliance to customer relationship management and even mobile outreach.
No wonder Ellie Mae handles roughly 25% of all home loans today. There are roughly 5,000 mortgage lenders in the United States, so that’s quite an accomplishment. Moreover, the five biggest U.S. banks account for 15% – roughly 40% less volume combined.
To show you why this firm and its stock still has plenty of upside ahead, let’s run it through those five Your Tech Wealth Blueprint “rules” – they’re my five filters for building wealth with market-crushing tech winners…
Rule No. 1: Great Companies Have Great Operations
We always look for well-run firms with topnotch leaders.
Ellie Mae CEO Jonathon H. Corr is a veteran of the firm. He served as chief operating officer in spring 2011, when the company went public at roughly $6 a share. Before joining Ellie Mae, he had management roles at PeopleSoft and web pioneer Netscape.
Corr has surrounded himself with top talent. His senior leaders hail from such respected firms as General Electric Co. (NYSE: GE), IBM Corp. (NYSE: IBM), Microsoft Corp. (Nasdaq: MSFT), Digital Equipment Corp., and Lehman Brothers. They’ve won a string of awards, including highly respected ones from Software and Forbes magazines.
Rule No. 2: Separate the Signal From the Noise
To create real wealth, you have to ignore the hype and find companies that have rock-solid fundamentals.
When the Federal Reserve raised interest rates late last year and promised to do so again in 2017, many investors feared that home prices and loan demand would collapse.
The good news is that it gave us a new buying opportunity. Shares of Ellie Mae fell 22% right after the Nov. 8 election through Dec. 1 – but they’ve since consolidated and seem to be set for a powerful new rally.
This comes as a new CoreLogic HPI Forecast says U.S. housing prices will rise by 5.3% for the fiscal year that ends in August. That indicates a brisk market that will generate higher loan demand.
Rule No. 3: Ride the Unstoppable Trends
We look for stocks in red-hot sectors because they offer the best chance for life-changing gains.
Technically speaking, the mortgage market is neither high tech nor a double-digit grower. But the cloud-based software-as-a-service (SaaS) sector sure is.
It’s so hot because, with SaaS, clients basically rent their applications that are delivered via the web, bypassing the need to buy expensive software packages
IDC has forecast that, by the end of next year, the domestic SaaS market will account for at least 27% of the market for enterprise software, with a market value of $50.5 billion. According to Goldman Sachs, the global SaaS market hit $106 billion in 2016, up 21% from 2015.
Rule No. 4: Focus on Growth
Companies with the strongest growth rates almost always offer the highest stock returns… and that’s why we seek them out.
Ellie Mae is a bona fide growth machine. Last quarter, it posted a 60% gain in earnings on a 46% increase in sales. Profits are rising faster than sales, so profit margins are growing as well.
Back in 2012, Ellie Mae had 60,000 SaaS users. In just four years it more than tripled that number to 206,000 users. Considering that there are roughly 850,000 mortgage professionals, the firm still see plenty of growth ahead.
Rule No. 5: Target Stocks That Can Double Your Money
This is where we look at the firm’s earnings growth and see how long it will take the firm to double profits. By doing that, we can figure out how long on average it should take for the stock to roughly double.
I’ve gone through the firm’s financials in detail and I’m believe that earnings per share will grow by 25% a year over the next three years.
(That’s a conservative estimate.)
Now we use what I call my Doubling Calculator.
Mathematicians call it the Rule of 72.
Divide the compound growth rate of 25 into the number 72.
We find that it should take just under three years for Ellie Mae to see 100% gains.
Ellie Mae trades at about $83, giving it a market cap of $2.79 billion. It has nearly $388 million in cash on hand and almost no debt. In last year’s third quarter, it grew sales per active user by 23%, to $640, and says the total market it can address is worth $6.2 billion.
This is the kind of backend play on a massive industry in transition that you can can’t afford not to take a closer look at, “Buy,” and then “Hold” for a good long while.
And remember, in today’s tech-centric society, digital beats paper just about every time…
… Unless you’re talking about all the cash that will pile up if you own a quality stock like Ellie Mae.
— Michael A. Robinson
Source: Money Morning