Voss Capital Thinks Mr. Cooper (COOP) Still has a +35% Upside

Voss Capital, an investment management firm, published its fourth quarter 2020 investor letter – a copy of which can be downloaded here. A return of 20.81% was recorded by its Voss Value Fund LP, and 20.67% by its Voss Value Offshore Fund in the fourth quarter of 2020, both below its Russell 2000 Value Benchmark that delivered a 32.72% return and its Russel 2000 TR Index that was up by 31.37% in the same period, but above the S&P 500 TR Index that gained 12.15% in the fourth quarter. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Voss Capital, in their Q4 2020 investor letter, mentioned Mr. Cooper Group Inc. (NASDAQ: COOP) and emphasized their views on the company. Mr. Cooper Group Inc. is a Coppell, Texas-based company that provides servicing, origination and transaction based services. It currently has a $3.2 billion market capitalization. Since the beginning of the year, COOP delivered a 15.63% return, massively extending its 12-month gains to 552.36%. As of March 22, 2021, the stock closed at $35.88 per share.

Here is what Voss Capital has to say about Mr. Cooper Group Inc. in their Q4 2020 investor letter:

“Another new long that is a value oriented special situation is Mr. Cooper (COOP). COOP is trading at 6x NTM earnings and under 1x NTM tangible book. Like MBIN, we believe the shares offer an asymmetric bet towards ongoing strength in mortgage originations and refinancing activity along with hard catalysts in the next 6-12 months that should force the stock to re-rate.

Mr. Cooper’s business segments offer natural hedges to each other. When rates rise, their mortgage servicing business does better; when rates fall (like now) their refinance and mortgage originations division does better. If there is mortgage market weakness or consumer distress and foreclosures surge, their Xome business, an online real estate marketplace known for auctions, thrives.

Our thesis for Mr. Cooper is two-fold. Firstly, we believe the stock has been “held back” because it is perceived to be a temporary, but unsustainable, beneficiary of the spike in refinancing. Not only do we believe refinancing can continue into 2021 (refi mortgage apps up 45.6% y/y for the week ended February 5th), which will increase book value, but we also believe their mortgage servicing business will pick up when refinancing and originations ebb, smoothing the earnings far more than is currently priced in.

Secondly, management has telegraphed their intent to sell Xome, either part or in whole, and have been adamant the business is worth “at least $1 billion”, a number that seems both plausible and potentially conservative in the current market environment with frothy FinTech/marketplace valuations. While Xome’s results are present on the income statement, its value is nowhere to be found on the balance sheet. With a sale in the $1 billion range Mr. Cooper will be swimming in cash like Scrooge McDuck.14 The sale will also materially increase tangible book value per share, which is how most investors value the stock. Because of tax accounting around their Net Operating Losses(NOLs), the company will have more flexibility around buybacks and special dividends starting in August. So, our thesis is that a sale of Xome will occur and the market will either push the company to at least tangible book value, or management will force the issue by aggressively buying back stock and/or issuing a large special dividend. We think the stock has >35% upside over the next six months.”

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Our calculations show that Mr. Cooper Group Inc. (NASDAQ: COOP) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Mr. Cooper Group Inc. was in 22 hedge fund portfolios, compared to 23 funds in the third quarter. COOP delivered an 18.38% return in the past 3 months.