It’s time to buy Mortgage Choice

Investing in the stock market is like a box of chocolates, you never know what you’re going to get. Well that is, unless you read the information on the outside of the box.

Small-cap stocks come with fewer guarantees and as such, gives investors an opportunity to grab a hold of some great long-term earners. Doing your due diligence on a stock minimises the risks and buying a good stock at a great price is the best thing an investor can do.

In a bitter mortgage war between the big banks, especially Commonwealth Bank  (ASX: CBA) and Westpac (ASX: WBC), many of Mortgage Choice’s (ASX: MOC) rivals have been consumed by the big players in a bid to increase market share. Mortgage Choice has been increasing its market share all on its own.

Since June 2010, the company has increased its market share of home loans from 4.0% to 4.5% but was negatively impacted by the massive slowdown in the new home loan market when housing prices took a dive. Since that time, the group has focused on becoming more efficient by lowering costs and has only recently begun to supply customers with its newly established financial planning services.

Is now is the time to buy?

You don’t have to be an analyst to know that when house prices rise, people sell and refinance. Australian house prices have reached three-year highs, not seen since March 2010, spurred on by lower interest rates and increased consumer confidence.

In its most recent yearly report, Mortgage Choice reported less than satisfactory results and CEO Michael Russell attributed the result to “an extended period of dampened consumer and business confidence” although he acknowledged that with “green shoots emerging in the property and housing finance markets, an uplift in conditions now looks very likely… this should go a long way in improving consumer and business confidence throughout the remainder of this financial year”, Mr Russell said.

The group has also been heavily investing in marketing the company, including expanding its online presence including through its comparison website “Feedback from our network has been overwhelming and we are excited to be moving on to the next phase of our brand refresh”, Mr Russell said in the company’s most recent half-yearly report.

Low interest rates, a fairly priced equities market and a period of subdued property movements will provide the spark for both new and existing home owners.

Mortgage Choice is a cyclical business that is highly leveraged to property growth to deliver results and as such, has had a patchy past few years. Even still, the company has managed to pay healthy dividends and based on current prices will pay a shareholders a dividend of 5.4% fully franked.

Currently, Mortgage Choice has a market capitalisation of $297 million and a debt-to-equity ratio of zero. The healthy balance sheets and cash flow has allowed the company to pay its great dividend despite a slower demand for its products. The annual turnover of shares is 27.4% and for the last four weeks has averaged a daily value of $201,000. This is important for small caps, as purchases and sales of the stocks can be extremely illiquid.

The largest shareholder of the company is Commonwealth Bank, a situation that could potentially represent a takeover play. Especially since rival Westpac acquired RAMS in 2008, CBA will be looking to increase its market share.

Foolish takeaway

Mortgage Choice is strong business in a booming environment that represents great long term value. Investors should understand the risks associated with the business before making the decision to purchase the stock. However, investors could do worse than find a place for it in portfolios or on a watchlist.

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Motley Fool contributor Owen Raszkiewicz owns shares in Mortgage Choice.

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