FICO losing its monopoly isn’t the best reason to sell the stock — so here’s a better reason.
Raise your hand if you know what a FICO score is. Now, keep your hand raised if you know the company that developed the FICO score is also a publicly traded stock: Fair Isaac (FICO -12.90%).
I’m seeing a lot of hands up right now, from investors who own Fair Isaac stock today — and kind of wish they didn’t.
Image source: Getty Images.
What just happened to FICO?
Shares of Fair Isaac plummeted 16% through 2:10 p.m. Tuesday, and all because of one tweet. This morning, director of the Federal Housing Finance Agency William Pulte posted on X that, in order to reduce housing costs, Fannie Mae and Freddie Mac will permit lenders to use something other than a borrower’s FICO score to determine creditworthiness.
Specifically, they’ll allow use of Vantage 4.0 Scores, a creditworthiness program co-developed and marketed by credit rating agencies Equifax (EFX -0.01%), Experian (EXPN 0.98%), and TransUnion (TRU 1.96%).
Investors in Fair Isaac are predictably panicking at the loss of their company’s effective monopoly on FICO scores.
Is Fair Isaac stock a sell?
But should they be panicking? After all, Fair Isaac points out that the $3.50 it charges for providing a FICO score to a lender amounts to just 0.2% of typical mortgage closing costs. It’s possible that Vantage 4.0 Scores are cheaper, but it’s hard to imagine they’re that much cheaper, or cheap enough to make much of a difference to lenders. Just because Fannie and Freddie will permit lenders to choose Vantage over FICO, therefore, doesn’t necessarily mean it will happen.
That being said, Fair Isaac stock does cost quite a pretty penny at more than 80 times earnings today. Pulte’s tweet may not be a good reason to sell FICO stock — but the very high price is a better reason to sell.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equifax. The Motley Fool recommends Experian Plc and Fair Isaac. The Motley Fool has a disclosure policy.
Great Job newsfeedback@fool.com (Rich Smith) & the Team @ The Motley Fool Source link for sharing this story.
