A long time coming, the Federal Reserve will likely lower the benchmark interest rate. And that may have significant implications for loanDepot (LDI), which specializes in mortgage loans and other credit-based products, including unsecured personal loans. While a long-term investment in LDI stock may still be a risky proposition, options activity suggests that a near-term scalp could be in the cards.
Fundamentally, the Fed may have the necessary data to justify a pivot toward a dovish monetary policy. As Barchart contributor Don Dawson explained, “US producer prices, often a precursor to where consumer prices might be heading, rose by just 0.1% month-over-month in July, a figure that came in lower than economist forecasts. Over the year, the Producer Price Index (PPI) increased by 2.2%, hovering near the Federal Reserve's (Fed) 2% inflation target.”
Further, Dawson noted that July’s Consumer Price Index (CPI) report “indicated a slight cooling of inflation, which was mainly in line with market expectations and helped to maintain investor optimism about future Fed rate cuts. The CPI climbed 0.2% compared to June. Core CPI, which removes the more volatile food and energy prices, also increased by 0.2%. Both figures were in line with the analyst's forecast.”
Supporting data came from the gold market. Barchart’s Darin Newsom wrote that the precious metal “has extended its long-term uptrend with many pointing to the expected rate cuts and weaker US dollar rather than the reality of increased uncertainty.” The implied move toward a controlled inflationary environment naturally lifted hard assets. As well, the anticipation of lower borrowing costs contributed to the rise in LDI stock.
With 30-year fixed mortgage rates still hovering around 7%, it’s incredibly challenging for families to buy a home. Lower rates may help mitigate this obstacle, thereby boosting LDI stock. Plus, if the activity in the derivatives market is any indication, loanDepot may have more to run.
Unusual Options Activity Smiles on LDI Stock
Following last Friday’s close, LDI stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. This data interface is especially useful for deciphering where the smart money may be directing its funds.
Total volume during the Aug. 16 session reached 14,145 contracts versus an open interest reading of 15,582. The difference between Friday’s volume and its trailing one-month average metric clocked in at 1,161.82%. Notably, call volume itself spiked to 13,247 contracts while put volume measured only 898. This pairing led to a put/call volume ratio of 0.07.
On paper, this ratio appears incredibly bullish. Call options give holders the right but not the obligation to buy the underlying security at the listed strike price. However, it’s also important to note which party – large investors or retail traders – is doing the buying and selling.
For that information, we can turn to Barchart’s options flow screener, which filters exclusively for big block transactions likely placed by professional or institutional investors. Interestingly, net trade sentiment during the Friday session stood at $235,100, favoring the bulls.
What’s more, the premiums of all options with bullish sentiment landed at $339,800. The same exercise for bearish sentiment options sat at $-104,700. Stated differently, there was a considerable gap in sentiment, with most major investors betting heavily on the upside.
There appears to be a compelling technical justification for the optimism. Back in December of last year, LDI stock popped from approximately $2 to around $3.63. The angle of this sharp rise reached approximately 79 degrees.
More recently, LDI stock began rising in late July from below $2 to Friday’s closing price of $2.81. Here, the angle of attack (if you will) reached 69 degrees. That suggests there may be more left in the tank regarding this bull run. Should the same momentum from last December be juxtaposed to the current rally, it’s possible that LDI stock could hit around $3.56.
Now, speculators should be cautious about betting too heavily on LDI stock. That’s because Friday’s candlestick saw a long upper wick relative to the size of the body and lower wick. It somewhat resembles a shooting star pattern and could indicate an incoming reversal due to upward momentum waning. That’s one of the reasons why LDI isn’t signaling strength as a long-term investment.
However, an immediate reversal might not materialize. During the Dec. 15 session last year, a similar shooting star-like pattern emerged. That still led to significant upside before a correction took place. Therefore, speculators may have some room for growth to $3.56.
Valuation for loanDepot is Enticing
Finally, market gamblers should consider the valuation of LDI stock before making a decision. Currently, the company’s equity trades hands at 0.91X trailing-year revenue. That’s quite low compared to the underlying mortgage finance sector’s average multiple of 2.24X.
In addition, analysts believe that sales could rise to $1.06 billion by the end of this year, with a high-side estimate of $1.09 billion. Frankly, the latter metric wouldn’t be out of the question if the lower rates materialize. A lot of borrowers are sitting on the sidelines. Once the rate cuts go live, that could open up the floodgates.
However, the real growth could happen in fiscal 2025. Analysts project on average that sales may reach $1.3 billion. If so, that would be a 23.1% lift from projected 2024 revenue. Assuming a shares outstanding count of 323.59 million, that would imply that LDI stock is trading at only 0.7X forecasted 2025 sales.
Further, analysts also see loanDepot posting earnings per share in 2025, ranging from 6 cents to 23 cents. That alone wouldn’t make the company the strongest investment ever. However, there’s enough technical and financial width to see LDI stock break above the $3 level.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
