The secret behind the top mutual fund on the planet

This fund has returned 44% in the past year, and this stock accounts for 43% of its portfolio. Is it right for yours?

By StreetAuthority Aug 7, 2013 4:32PM
Image: Mutual funds (© ThinkStock/SuperStock)By Chad Tracy

With a return of 43.9% over the past year, Fortress Investment Group (FIG) is currently the top-performing mutual fund on the market.

The company began operations as a private equity firm in 1998, with $400 million under management. Between 1999 and 2006, the firm averaged a return of 39%. And now, operating as a mutual fund, the group manages more than $54 billion.

The fund's success merits a closer look -- and while reviewing the company's portfolio, I made a surprising discovery.

Most mutual funds tend to maintain a more conservative portfolio of holdings that encompass a wide variety of market sectors. And most fund's largest holding rarely makes up more than 25% of the portfolio.

But Fortress is different.

In fact, in the company's current holdings, just one stock makes up 43% of the overall portfolio. Fortress owns more than 67 million shares of this company -- a total investment of over $3.1 billion at today's prices.

And so far, Fortress' decision to put over $3 billion worth of eggs in one basket has been right on the money. The stock has been on a tear: up 49% since January, 110% during the past 12 months, and 225% over the past three years.

The name of the company? Nationstar Mortgage Holdings (NSM).

But as with any stock that has shown spectacular results in the past, how are we to know that this explosive growth will continue?

Let's start with revenue. Similar to a bank, Nationstar makes money by issuing home mortgages and collecting interest on the loans. Although the company doesn't get a lot of press, Nationstar is actually one of the largest mortgage servicers in the U.S. The company's portfolio includes more than 1.9 million residential mortgages with $312 billion in unpaid principal. When you consider that Nationstar's market cap is "only" $4.4 billion, you begin to realize the potential for future profits.

Some analysts are concerned that rising interest rates could stunt the current housing rebound. But due to recent acquisitions and an increase in service fee income, NSM's total revenue in 2013 is projected to double the revenue earned in 2012 ($859 million).

NSM recently purchased a mortgage portfolio from Bank of America (BAC) worth $215 billion. On top of that, it acquired two other mortgage brokers: Greenlight and Equifax. Although these purchases have left Nationstar cash-flow negative in the near term, the company made these purchases without going into debt or diluting shares with new issuances.

Earnings per share were $2.40 last year. But the company expects to triple EPS by next year, with projections ranging between $6.45 and $7.50.

The price-to-book ratio is high at 5, which makes NSM a slightly riskier investment at today's (near record-high) prices. But earnings have been so strong that even with the run-up in stock price, shares are trading at a forward price-to-earnings ratio of 8.

Risks to consider: Rising interest rates and a downturn in the housing market could have a negative impact on earnings. Like any loan, the mortgages Nationstar holds are at risk of default. The company does not currently pay a dividend, so any investment is a bet on continued growth to generate returns.

Action to take:
For speculative investors who believe the housing market will continue to thrive, Nationstar should be an excellent investment over the next two years.

Chad Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

Aug 8, 2013 7:08AM
It's ridiculous to call any 1-year mutual fund champ the current "top fund on the planet."  EVERY year the top fund is a sector or limited exposure fund whose area of concern has had an extraordinary year.  It's seldom duplicated.

Aug 8, 2013 10:27AM
The author forgot to mention that it lost over 90% of its value during the 2008 crash, and is still down roughly 70% from its 2007 high.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.