PennyMac Looks Iffy Despite Upgrades

NEW YORK (TheStreet) -- PennyMac Financial Services  (PFSI) has received a pair of analyst upgrades lately following a recent sell-off, but an investment in the non-bank mortgage lender and servicer still looks risky.

PennyMac shares hit a multi-week high of $18.69 on March 24 but fell sharply in subsequent days after the company announced that Fidelity Investments Charitable Gift Fund would sell 6.1 million shares, equal to 8% of the total outstanding. Fidelity acquired the shares at the time of PennyMac's initial public offering, according to a report from Jefferies analyst Daniel Furtado Tuesday.

Furtado upgraded PennyMac to "buy" from "hold" in his write-up, arguing the company will be a "long-term beneficiary [from] US residential mortgage reform." His upgrade follows one from Wells Fargo analyst Joel Houck Friday.

PennyMac shares, which hit a recent low of $15.80 March 27 were up 3.45% to $17.21 Tuesday morning.

But the potential for further dilution is still very real. Even after the sale by Fidelity, Furtado's report notes that "only about 25% of authorized shares currently float with three large investors holding concentrated positions."

On the other hand, Furtado's argument for recommending PennyMac seems a bit thin. His report states that PennyMac will be a beneficiary as "the mortgage market evolves away from heavy government intervention."

But that transition will inevitably take longer than everyone thinks. Government moves at a snail's pace even when the appetite for reform is great. But when it comes to mortgage reform, no politician is eager to risk stalling or potentially crashing the fragile recovery by removing government support.

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