The Road to Housing Act’s almost certain winner

Yesterday, I covered the rental ramifications of the Road to Housing Act…

Which President Trump may or may not have signed into law by the time you’re reading this. Though probably not.

His decision to hold it hostage until the voter registration-focused SAVE America Act sees some progress in the Senate took everyone by surprise on Wednesday morning. And since he doesn’t have the Congressional votes for SAVE even on the Republican side, this standoff could take a while.

Regardless, I do believe the Road to Housing Act bill will pass eventually. So my P.S. at the end of Wednesday’s copy to “stay tuned” still stands. Because while writing about the legislation, I realized there’s “a beaten-down stock that could benefit massively” from that law-to-be.

Unlike the companies I wrote about yesterday, this potential portfolio pick isn’t a real estate investment trust (REIT). It’s not even a landlord.

It’s on the homeowner side of the housing equation. So it’s not in danger of losing out whenever the Road to Housing Act does go into effect.

In fact, Fair Isaac Corp. (FICO) should benefit – quite possibly intensely – from the Act’s efforts to boost homeownership.

You might not have heard of the company itself, but I bet its ticker symbol looks familiar. Fair Isaac (which, to be fair, is commonly called FICO) is the force behind FICO® Scores that measure consumer credit risk.

FICO gathers raw data from Equifax, Experian, and their fellow big credit bureau, TransUnion. Then it throws all that information into its proprietary algorithm to generate a three-digit number designed to show how likely an individual is to pay back debt.

The vast majority of U.S. lenders – more than 90% – rely on FICO® Scores to determine whether they’ll do business with someone… how they’ll do business with them… and at what rates.

That makes Fair Isaac a very big deal already. And I think it can become an even bigger deal from here.

It’s important to know that Fair Isaac, or FICO, isn’t just a credit score keeper. It also runs a software division that sells compliance software and fraud detection applications, among other tools.

But while that’s both fascinating and profitable, it probably won’t change much under the ROAD to Housing Act. Whereas its much better-known credit score segment will.

And almost undoubtedly for the better.

It goes without saying that FICO’s mortgage-related business is tied to the housing market. When people are buying homes, it gets more business. When they’re not, that traffic decreases.

As such, the last few years haven’t seen as much FICO-running activity as 2020, 2021, and 2022 did. Yet it’s not hard to see how 2027 – when the ROAD act can start seeing real results (assuming it’s enacted) – could change all of that as would-be buyers get more opportunity to become actual buyers.

There’s also the fact that interest rates should decline next year, hopefully substantially, even if they don’t this year. And since mortgage rates are associated with (though not completely tied to) Federal Reserve policy decisions, they should fall, too.

Once again, that would mean more buyers entering the market, as well as more current owners refinancing… with both activities almost always requiring FICO® Scores.

Some investors and analysts have begun focusing on rising credit check competition. In particular, they point to VantageScore, an upstart entity since 2006 that has been making a name for itself.

Just not enough of a name to change my opinion on FICO anytime soon.

I’m not discounting VantageScore completely. Ignoring competitors is rarely a wise investment move to make. But judging by the fact that it’s been around for 20 whole years now… yet Fair Isaac still has a 90% cut of their shared market…?

Well, I hope you’ll forgive me if I’m not quaking in my boots.

FICO® Scores are, simply put, the consumer credit world’s standard language. Lenders use them. Investors rely on them. Regulators understand them. Consumers monitor them.

People throw the term around without even blinking. If anything, they’d blink if they had to use anything else. So it’s easy to conclude that FICO’s stock market critics are putting too much emphasis on unlikely possibilities that aren’t going to manifest anytime soon.

If they do at all.

Here’s another reason I’m not worried about FICO’s continuing dominance in the credit checking field.

The company has an exceptional operating performance and a long track record of execution that are hard to beat. If anything, Fair Isaac has consistently strengthened its business since Bill Fair and Earl Isaac first opened it in 1956.

It’s seen numerous market dips and dives, recessions and calamities. Yet it’s always come out ahead.

In fact, it’s more than doubled its operating margin profits since its fiscal-year 2016, from about 27% to almost 60%.

That’s extraordinary movement for any company, much less one as large and well-established as FICO. To put it into perspective, management improved their profitability by several hundred basis points (bps) annually and repeatedly to achieve those results.

That requires operational discipline, pricing power, and competitive positioning that’s difficult to come by.

Of course, it doesn’t hurt that FICO’s customers just roll with whatever price increases it levies whenever it levies them. And with good reason.

When lenders want to make mortgage loans worth hundreds of thousands of dollars, paying for a credit score is nothing. That’s especially true since it can save or even make them money by giving them a better understanding of what they’re dealing with.

And, with all due respect to VantageScore and its efforts, people handling that kind of money like to stick with experts they know. They don’t want to take unnecessary risks giving competitors a chance, no matter how much cheaper they might be.

Knowing all that, it should come as no surprise that FICO’s underlying business is doing well despite the current housing mess. Management even raised its full-year guidance after reporting Q2 results.

The company now expects revenue of around $2.4 billion, or about 23% growth year-over-year.

It also raised non-GAAP (generally accepted accounting principles) net income guidance 29% to around $946 million. And non-GAAP earnings per share (EPS) guidance now sits at $40.45, representing estimates of about 35% growth.

So think what Fair Isaac could do in a better, booming economy…

Here at Wide Moat Research, we typically look for businesses that feature:

Fair Isaac doesn’t fit those last two standards since it doesn’t offer a dividend at all and therefore has no dividend yields. The stock is also trading well above $1,000, so it’s not suitable for everyone in that regard either.

Even so, it’s down 33% year-to-date, which we see as a good entry point for more risk-tolerant investors to consider.

Fair Isaac remains one of the highest-quality franchises in financial technology by our estimation. And we believe its shares could generate total returns up to 50% over the next 12 months if – and as – the ROAD to Housing Act really takes off.

Happy SWAN investing,

Brad Thomas
Editor, Wide Moat Daily

Wide Moat Research recently reviewed the concept of HALO stocks: publicly traded companies that are immune to the threat of artificial intelligence (AI) rendering them obsolete.

And it’s hard to find businesses that are more HALO-ish than those centered around growing and making food.

If you want to diversify your portfolio outside of the AI trade, this week’s Wide Moat Show could be precisely what you’ve been waiting for.

Click here to watch the full episode.