Stewart Information: Real estate for generations
Family-owned for over a century, this mortgage firm is a value play on a long-term recovery in real estate.
The home mortgage market may have caused the global financial crisis in 2008, but the housing market has come roaring back and is expected to remain strong for years to comes. Americans are still relatively sober about housing; they aren’t showing "irrational exuberance" about home investing to the degree they did in the past, at least not yet.
My top housing pick is Houston-based Stewart Information Services (STC), a real estate business founded in 1893 that is still owned and managed by the founding family.
I am attracted to the passion and long-term focus of founding families that love their companies and wouldn’t do anything to jeopardize their future success in order to make a quick buck. CEO Matt Morris is a fifth-generation member of the founding Stewart family to run the company.
Stewart started off as a title insurance company that focused on performing the due diligence necessary to ensure that real estate being sold was owned by the purported seller and did not have any undisclosed property liens that diminished the value of the property.
Over the years, Stewart has expanded into several types of mortgage outsourcing services, including evaluation of the riskiness of individual mortgage loans and mortgage-backed securities for lenders and investors, mortgage loan modification, post-closing support, and foreclosure/short-sale consulting.
In 2012, the company was honored by Forbes magazine as one of America’s 100 “most trustworthy companies” and generated the highest growth in earnings per share of any of the 100 largest publicly-traded companies in the Houston metropolitan area, according to The Houston Chronicle.
This excellent performance was good enough to get Stewart added to the Barron’s 400 Index, which measures the performance of “the most fundamentally sound and attractively priced stocks.”
Only 6 percent of all North American publicly listed companies make the cut and the index has outperformed the general market by more than five percentage points per year over the past decade.
For the four fiscal years from 2007 through 2010, the company lost money each year, but earnings have come roaring back under the corporate restructuring and the improved housing market.
I believe the current state of high profitability is not only sustainable, but capable of significant growth under CEO Morris, who is largely responsible for the recent successful restructuring.
One exciting area of future growth (besides mortgage services) is expanding title insurance services to the commercial real-estate sector.
Up until recently, Stewart has been constrained from winning commercial title business because its insurance rating has been below "A," but in August Fitch Ratings upgraded Stewart’s insurance rating to "A-" from "BBB+." This insurance upgrade promises big profit improvements for Stewart in future quarters.
Despite the company’s high profitability and a debt-to-capital ratio below 5%, Stewart remains extremely inexpensive with a price-to-earnings ratio below six times.
Curiously, the company’s short interest-to-float ratio is elevated at 13%, which suggests some skepticism either about the housing recovery and/or the sustainable success of Stewart’s corporate restructuring.
I’m confident about both, so I view the high short interest as a positive catalyst based on a possible short squeeze in the not-too-distant future. I’m adding the stock to my value portfolio.
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