Ocwen Financial Corporation (NYSE: OCN) is a little-known small cap bank that is headquartered in Atlanta, Georgia. The appeal for this bank resides in its reliance upon loans and savings, particularly mortgages. This falls right in line with the latest trend to take a look at smaller, conservative regional banks that do not have the risks and problems that are associated with the big banks that often have an investment banking arm or engage in risky trading practices. Additionally, Ocwen and other regional banks are able to sidestep the large lawsuits and government scrutiny because of their lack of involvement in the 2008 financial collapse. I believe the regional banks will continue to be the better bet in 2013, despite the larger banks’ ability to bring in large sums of money based on trading, as the market continues higher. Eventually, this run will come to an end and, depending who you listen to, we could see a sizeable bear market during the second half of this year. That is why I suggest sticking to more conservative banks such as Ocwen Financial.
Currently, the bank has a market cap of $5.52 Billion and currently holds a “buy” rating from analysts. The stock has a high price to earnings of 44 but the forward price to earnings of 9.17, implies a sizeable increase in earnings. We can see more evidence of explosive earnings growth with analyst estimates of 120% rise this year and 211% next year. This is a considerable jump in earnings that is brought about due to the rise in demand for residential and commercial mortgage loans as the housing market continues its rebound. On the downside, Ocwen Financial is not undervalued compared to its PEG of 1.93, price to sales of 7.22, price to book of 3.6 and its price to cash of 20. Additionally, there is some risk involved as the company has a short-term debt to equity load of 1.21 that will be paid off within a year. While the bank has cash per share of 2 and will be able to cover their debt obligations, it could limit buybacks, dividends and acquisition capabilities. That being said, Ocwen is in much better financial health than its competitor Nationstar Mortgage Holdings Inc. (NYSE: NSM), which has more IOUs than cash on hand.
However, Ocwen is currently in the lead to buy a “portfolio” of mortgage collecting rights from Ally Financial Inc (NYSE: GMA). The value to of the collecting rights is estimated to be around $1 billion. The deal is a win for Ally Bank, who needs to still pay off $14.6 billion in bailout loans from the US government. As for Ocwen, the collection rights will help lead the bank to continue its “explosive growth” (Reuters). However, Ocwen may be currently in the lead in the bidding but sources indicate that there is another contender that is closely behind.
The bottom line here is Ocwen Financial is a small cap bank that is shielded from the “too big to fail” crowd of banks that continue to engage in risky trading practices and are under constant scrutiny of the US government. Ocwen would greatly benefit from winning the Ally bank deal, which appears it may as of this writing. All in all, Ocwen is a conservative bank that will lead you to outperforming gains over time.