As a long-term investor, I generally ignore most Reddit stocks. AMC, GameStop and Fastly have all risen but then fallen from record highs, and I think are likely to fall further.
I believe it can make sense for some investors to take small, short-term, speculative positions in meme stocks, with the understanding that the potential rewards come with very high risk. However, I like to keep the stocks I buy for at least five years, so the the short-termism of Reddit traders is incompatible with my usual trading strategy.
The only Reddit stock I’ve bought so far is Blackberry. That’s because I view its long term prospects as my core reason for buying. Of course, I’d be very happy if it experiences a Reddit-induced surge. But if not, I don’t mind, because I believe in its fundamentals.
Mortgage stock
I think UWM Holdings (NYSE: UWMC), the biggest wholesale mortgage lender in the US, is another Reddit stock with long-term potential for my portfolio.
UWM generates profits by funding mortgages, underwriting their risk, and then selling those mortgages to independent mortgage brokers. The company has a 20% market share because of its proprietary technology platform that gives it a competitive edge.
Q2 earnings contained plenty of positive news for the Reddit stock. Chairman and CEO Mat Ishbia stated that it was “our best quarter of all-time in terms of overall production”. Encouragingly, with some analysts predicting a downturn in the housing market next year, he also stated that “UWM is built to succeed not only when margins are at record highs, but also when margins are compressed”.
Positive numbers
UWM reported record loan originations of $59.2bn, a 90% increase compared to the same quarter last year. Purchase originations increased 288% from $6.2bn in Q2 2020 to $24.1bn in Q2 2021.
Unpaid balances of mortgage servicing rights increased to $260.5bn up from $109.4bn in Q2 2020. The company feels strong enough in its financial position to start stock buybacks, repurchasing 790,599 shares for $6.1m. This reduces the number of publicly tradable shares, and could put upwards pressure on the share price.
UWM maintained an average ‘days to close’ of 18 days in Q2 2021. According to Ellie Mae, this is less than half the industry average of 47 days, and may be a key selling point for future customers.
Its 1.06% forbearance rates are also significantly better than the industry average of 3.76%, highlighting the reliability of its loan book.
The risks for the Reddit stock
The UWM share price is extremely volatile. At $7.05 as I write, it is almost at its historic low of $6.96 reached on 7 May. This is a long way from the high of $13.13 on 31 December last year. However, with a market cap of only $11.32bn, this is precisely why it could be a great value play.
There are wider issues that could hit the company though. Rising inflation could force the US central bank to hike interest rates, dampening demand for mortgages, and increasing the risks of defaults. There have also been repeated complaints about customer service that need to be rectified.
However, with short interest at 12.25%, I think there’s a fair chance of a Reddit-induced short squeeze. And for me, at just over $7 a share, and with a price-to-earnings (P/E) ratio of just 9, its price seems undervalued compared to its fundamentals.
