While plenty of high-yield opportunities exist, investors must always consider the safety of their dividend and the total return potential of their investment. It is not uncommon for a struggling company to suspend high-yielding dividends and subsequently result in precipitous share price declines.
TheStreet Ratings' stock rating model views dividends favorably, but not so much that other factors are disregarded. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e. how much one is willing to risk in order to earn profits?; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to its stock's performance.
These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. As always, stock ratings should not be treated as gospel — rather, use them as a starting point for your own research.
The following pages contain our analysis of 4 stocks with substantial yields, that ultimately, we have rated "Sell." Home Loan Servicing Solutions (NASDAQ: HLSS) shares currently have a dividend yield of 7.70%. Home Loan Servicing Solutions, Ltd., through its subsidiaries, engages in the acquisition of mortgage servicing assets. Its mortgage servicing assets consists of servicing advances, mortgage servicing rights, rights to mortgage servicing rights, and other related assets. The company has a P/E ratio of 12.08. The average volume for Home Loan Servicing Solutions has been 504,300 shares per day over the past 30 days. Home Loan Servicing Solutions has a market cap of $1.7 billion and is part of the real estate industry. Shares are up 24% year-to-date as of the close of trading on Wednesday. TheStreet Ratings rates Home Loan Servicing Solutions as a sell. The area that we feel has been the company's primary weakness has been its disappointing return on equity. Highlights from the ratings report include:
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Thrifts & Mortgage Finance industry and the overall market, HOME LOAN SERVICING SOLTNS's return on equity is below that of both the industry average and the S&P 500.
- The gross profit margin for HOME LOAN SERVICING SOLTNS is currently very high, coming in at 95.21%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 46.32% is above that of the industry average.
- Net operating cash flow has significantly increased by 49924.76% to $160.93 million when compared to the same quarter last year. In addition, HOME LOAN SERVICING SOLTNS has also vastly surpassed the industry average cash flow growth rate of 42.15%.
- The strong earnings growth this company has enjoyed -- up -- has apparently played a role in driving up its share price by a solid 25.72%. In addition, the rise in the general market has likely contributed to this stock's strong performance during this past year.Regarding the future course of this stock, we feel that the risks involved in investing in HLSS do not compensate for any future upside potential, despite the fact that it has seen nice gains over the past 12 months.
- HOME LOAN SERVICING SOLTNS has improved earnings per share by 32.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, HOME LOAN SERVICING SOLTNS turned its bottom line around by earning $1.23 versus -$0.01 in the prior year. This year, the market expects an improvement in earnings ($1.91 versus $1.23).
- You can view the full Home Loan Servicing Solutions Ratings Report.
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