Should You Sell Ocwen on Increased Regulatory Scrutiny?

On Nov 18, 2014, we issued an updated research report on Ocwen Financial Corp. OCN. We believe that ongoing regulatory probes pertaining to the company's business conduct may mar its growth prospects going forward.

Ocwen's run-in with regulators has been going on for almost a year now. Starting from the $2 billion foreclosure settlement deal in Dec 2013 to allegations of backdating the foreclosure correspondences to borrowers in Oct 2014, the company's stock has been witnessing a steady downward movement. If Ocwen does not address all these issues soon, its creditability will continue to suffer.

Hit by these concerns, the analysts have been bearish on the stock as evident from the decline in the Zacks Consensus Estimate over the last 30 days. For 2014, the Zacks Consensus Estimate dropped 42.1% to $1.28 per share, while for 2015 it fell 19.6% to $2.26 per share.

Further, acquisitions over the last few years have resulted in increased costs and risks at Ocwen. Over the last 5 years (2009–2013), operating expenses have grown at a CAGR of 40.7%. This trend continued in the first nine months of 2014 as well, mainly due to increased spending on technology and compliance. Also, as the company continues to expand and its compliance costs increase, expenses will keep on mounting.

Ocwen currently carries a Zacks Rank #5 (Strong Sell).

Stocks That Warrant a Look

Some better-ranked finance stocks include Essent Group Ltd. ESNT, Walker & Dunlop, Inc. WD and Home Loan Servicing Solutions, Ltd. HLSS. While both Essent Group and Walker & Dunlop sport a Zacks Rank #1 (Strong Buy), Home Loan Servicing Solutions holds a Zacks Rank #2 (Buy).