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Make a Play for Ellie Mae

Additionally, Ellie Mae has a pricing solution that makes it attractive to large regional banks, as well as the local single-branch credit union. The majority of its new deals are software-as-a-service (SaaS) sales that are entirely Web-based with no large upfront software or equipment costs.

The services are offered as either a standard subscription or a success-based pricing solution. The latter option requires customers to pay only upon completion of a successfully closed mortgage loan with low monthly minimums, creating very little price opposition for smaller lenders.

Ellie Mae targets the middle market, as many of the largest lenders in the sector have their own in-house systems, but smaller participants who can't afford to build out their own proprietary software packages need to reduce the time and costs necessary to take a residential mortgage from the initial application through the closing process.

Of the hundreds of thousands of U.S. residential originations in 2011, about half were handled by the retail branches of the top 20 banks, often referred to as mega-lenders. Local banks, credit unions, independent agents, and savings and loans, all of which are Ellie Mae's primary target market, handle the other half. So there is a ton of opportunity for the company to grow its business.

Shares of Ellie Mae priced at $6 in April last year, but really began to take off in 2012, more than doubling in price. It reported outstanding first-quarter results earlier this month, as revenues nearly doubled to $20.9 million. Earnings rose to $0.20 per share compared with a loss of $0.09 a year ago. The company was able to increase users to its Encompass online solution by 18,000 users while also increasing revenue per user.

Ellie Mae has shown a penchant for thriving in less than ideal mortgage market conditions, so any improvement in the sector over the next couple of years could spur this leader to surprising heights. This is another stock to consider on big dips over the summer.

At the time of publication, Markman had no positions in the stocks mentioned. Jon Markman is editor of the independent investment newsletter The Daily Advantage.

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