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Tickers in this Article: PMT, PMT, PMT, WFC, WFC, WFC, JPM, JPM, JPM
bear PMT 071713Alltoo often, traders will move their capital into a sector that’s hot,only towatch the stock they select lose value; other times we see perfectlygoodcompanies losing share value because their peers or sector are fallingout offavor.

Today’sBear of the Day, PennyMacMortgage PMT(Zacks Rank #5) might have a little bit of both goingon.

PennyMacMortgage Investment Trust is a real estate investment trust. TheCompanyoperates as a specialty finance company that will invest primarily inresidential mortgage loans and mortgage-related assets. Asubstantial portion of the mortgages they acquiremay be distressed and acquired at discounts to their unpaid principalbalances.

Their10%+ dividend makes them very attractive and since the housing marketis flourishing,they should be a raging buy, right?

Whilethe housing sector has been booming, the one-two punch from PMT is thefactthat PennyMac buys distressed debt from FDIC liquidations of failedbanks, USTreasury Legacy Loans Program auctions, and direct acquisitions frommortgageand insurance companies and foreign banks.

Ifless and less banks and loans are stressed or defaulting in thisimprovingeconomy, then theoretically they have fewer loans to buy and profitfrom.

Second,a rising interest rate environment is not favorable for a company likePennyMac. Even though the Fed is a ways offfrom actually tightening, even a change in monthly bond purchases couldquicklysend mortgage rates higher (they are up over a 1% in the last 70 daysor so)and stifle growth in housing.

ASilver Lining?
Even though shares of PMT have dropped almost 25% from a high of over$29.00 inFebruary, to their current value of just under $22.00, there mightstill behigh risks here.

Shareholdersand their attorneys are investigating CEO Stanford L. Kurland on claimsofself-dealing after certain statements that were made in an IPOstatement backin February of this year when PennyMac Financial Services filed aRegistrationStatement to be spun off by PMT.

Alook at the Zacks Price & Consensus chart shows a sharp,negative trajectoryin FY2013 and 2014 earnings estimates. This drop is commiserate withthe dropin share price and while the forward P/E of 7 and dividend yield ofover 10%seem very attractive, there could be some more pain before thissituationimproves.

Estimatesfor the current quarter and Q3 have come down dramatically as well andESPs arenegative for all periods.

Perhapsthis company has been beaten down a little too much here, but I wouldwait tosee what the earnings report shows on August 1st before jumpingin. There are way too many moving partsto this story and the fact that analysts have gotten this aggressiveleads meto believe there is really fire behind all the smoke.

Ifyou want to buy a mortgage related stock with a little less volatilityand risk,check out JPMorgan-Chase JPM(Zacks Rank #2) or America’s largest mortgage servicer,Wells Fargo WFC (ZacksRank #2).

JaredA Levy is one of the most highly sought after traders in the world anda formermember of three major stock exchanges. That is why you will frequentlysee himappear on Fox Business, CNBC and Bloomberg providing his timelyinsights toother investors. He has written and published two tomes, “YourOptions Handbook” and “TheBloomberg Visual Guide to Options”. You candiscover more of hisinsights and recommendations through his two portfolio recommendationservices:

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