A Housing Bear Finds Compelling Value in the 40%-Off Bargain Bin
PennyMac’s post‑earnings plunge makes this setup too good even for me to ignore.
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My regular readers know I have been negative about the residential real estate market for several years now — as I am with the commercial real estate sector as well. However, this trade idea is around a housing-related concern that has become cheap enough to add to my value portfolio.
PennyMac Financial Services (PFSI) is a specialty non-bank financial services firm focused on the production and servicing of mortgages. The company also provides investment management on behalf of mortgage real estate investment trust PennyMac Mortgage Investment Trust (PMT) .
The stock feels like it is in bargain territory after dropping roughly 40% after a significant fourth-quarter earnings miss. The decline was after a six-year rally that sent the shares up elevenfold, it should be noted. PennyMac was the second largest residential lender in 2025, behind only UWM Holdings (UWMC) , acquiring and originating mortgages totaling around $145 billion.
PennyMac acquires mortgage loans insured or guaranteed by the Federal Housing Administration, Veterans Administration, or USDA. It then pools these into mortgage-backed securities (MBS) guaranteed by the Government National Mortgage Association (Ginnie Mae) and sells them to institutional investors. The lender's servicing segment collects loan payments, remits principal and interest payments to investors, and manages escrow funds for tax and insurance expenses.
It also performs loss mitigation activities on behalf of investors, among other functionalities. This segment will get a boost from the proposed acquisition of Cenlar Capital’s sub-servicing business to be completed later this year. Once completed, this should push PennyMac to the number two player in this niche, up from its current fifth-place position.
Last quarter, results showed impacts from heightened competition as well as higher prepayments drove the miss as mortgage rates have come down recently. Average mortgage rates hit their lowest levels since September 2022 this past week. These factors compressed margins last quarter, despite strong loan production and servicing growth.
PennyMac’s balance sheet is in good shape with total non-funding debt to equity at 1.5 times and total liquidity of $4.6 billion. Revenues are projected to rise just over 20% this year, offsetting some margin compression.
In an overbought market, the stock trades just over eight times forward earnings estimates and 1.1x book value. The shares also provide a small dividend yield of 1.3%. Given the uncertainty of the current market, I am taking a quite conservative strike price on the following covered call trade.
Option Strategy
Here is how one can initiate a position in PFSI utilizing a covered call strategy. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the August $85 call strikes, fashion a covered call order with a net debit in the $76.00 to $77.00 a share range (net stock price - option premium). Liquidity is decent with the options against this equity.
This strategy provides downside protection of nearly 18% at midpoint over the trade’s duration which includes two dividend payouts of $0.30 a share. The strategy also provides upside return potential of approximately 12%, including dividends, even if the stock trades down 8% over its option duration.
At the time of publication, Jensen was long PFSI.
