We came across a bullish thesis on Rithm Capital (RITM) on ValueInvestorsClub by Norris. In this article we will summarize the bulls' thesis on RITM. Rithm Capital shares were trading at $10.94 when this thesis was published, vs. yesterday's closing price of $11.22.

Aerial city skyline highlighting a large modern office building owned by the REIT.

Rithm Capital (RITM), a REIT operating as a holding company, is recommended for a long position due to its potential transformation into a pure-play asset manager through a planned breakup into 2-3 separate public companies. This restructuring would involve the establishment of new management agreements with spun-off entities, resulting in higher management fees and a revaluation of the stock as fee-related earnings (valued at higher multiples) replace lower-value earnings. This transition could drive Rithm's stock price closer to $15-$20 per share, combined with a $1.00 annual dividend, potentially generating over 60% total return in the next few years.

Rithm's segments include RemainCo and SpinCos. RemainCo will focus on asset management, including the recently acquired $33 billion AUM Sculptor Capital, and Genesis Capital, a mortgage loans receivable business. SpinCos will include NewRez, a large non-bank residential mortgage origination-servicing platform, and an investment portfolio comprising over $17 billion in assets and $3 billion in equity.

Rithm's CEO, Michael Nierenberg, aims to transform Rithm from a mortgage-REIT proxy into a capital-light asset manager with attractive growth prospects. The Sculptor platform will facilitate raising capital for new strategies, while spinning off NewRez and the mortgage REIT will enable Rithm to establish new management agreements, significantly increasing management fees.

Rithm's asset management business is expected to grow, with potential cost-cutting at Sculptor and raising third-party capital for various strategies, such as MSR investing and transitional home loans. This could result in a $600 million+ management fee business, earning over $230 million in fee-related earnings.

Furthermore, NewRez's mortgage origination business is currently underperforming but has the potential for significant improvement if mortgage origination volumes return to 2019 levels, driving earnings higher. The servicing segment should continue to generate strong earnings if interest rates remain above zero.

The unbundling of Rithm will require execution by management, but Michael Nierenberg's successful track record and performance-based compensation provide confidence. The potential upside is substantial, with the stock potentially reaching $17 per share, while investors collect a ~9% annual dividend with potential for positive earnings inflection if the rate environment normalizes.

RITM is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 20 hedge fund portfolios held RITM at the end of the first quarter which was 19 in the previous quarter. While we acknowledge the potential of RITM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as RITM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: Analyst Sees a New $25 Billion "Opportunity" for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.

Disclosure: None. This article is originally published at Insider Monkey.