On Monday, Wunderlich Securities issued a research note detailing how economic factors will impact housing finance and mREIT performance.
Wunderlich noted that after six years of economic stimulus, the most recent jobs report was weak and suggests that Q1 2015 corporate profits and GDP growth numbers could be disappointing.
However, this isn't necessarily bad news for mREITs, which have trailed the broader market YTD.
Wunderlich – 5 Buy Rated Picks
Agency mREITs:- American Capital Agency Corp. AGNC – Buy, $26.50 PT, 12.3 percent yield.
- CYS Investments Inc CYS – Buy, $10 PT, 13.3 percent yield.
- Two Harbors Investment Corp TWO – Buy, $11 PT, 9.7 percent yield.
- Invesco Mortgage Capital Inc IVR – Buy, $19 PT, 12.7 percent yield.
- AG Mortgage Investment Trust Inc MITT – Buy, $20 PT, 12.7 percent yield.
Notably, the American Capital Agency $26.50 PT would represent an approximate total return of 36 percent. Invesco Mortgage Capital's $19 PT would represent approximately a 34 percent total return for investors, including the current dividend.
Wunderlich – Macroeconomic Rationale
Monetary Policy: Continued large purchases of agency MBS has kept the 30-year mortgage interest rate "range-bound at a historically low level;" however, Wunderlich also noted home ownership has continued to decline, particularly for potential buyers under 35 years old.
Weak March Job Creation: The BLS reported March results on April 3. Although unemployment remained at 5.5 percent, the economy only created 126,000 new jobs versus a moving average of 252,000 during the past 12 months.
Mortgage Carry Trade: There are still relatively good spreads of approximately 180 bps (basis points); according to Wunderlich, "With monetary policy potentially on hold for longer than previously expected, mortgage REITs could be oversold."Wunderlich – Bottom Line
Investing in mortgage REITs in 2015: "Dim outlook for multiple expansion, but near-term downside to dividends is limited."
Wunderlich – Investor Takeaways
Wunderlich believes that "the group could be viewed as oversold if economic data support delayed monetary policy tightening."
Wunderlich feels that two stocks particularly stand out comparing current valuations to value creation estimates for 2015:
- 1. American Capital Agency Corp: "Long-time favorite and top performer," with AGNC reported BVPS (book value per share) "stable at $25.79 at the end of February 2015."
- 2. AG Mortgage Investment Trust Inc: Has diversified its portfolio to include "45 percent credit-sensitive assets that are not subject to spread compression;" however, Wunderlich noted, "Shares trade at a 6 percent discount to trailing BVPS and trade to yield 12.7 percent."
Wunderlich mREIT Sector PT Risks
- Mortgage REITs are "generally levered and are interest-rate sensitive and, in some cases, credit sensitive," Wunderlich stated.
- Wunderlich noted, "There is risk that fiscal and monetary policies to stabilize the secondary housing finance market could be ineffective or could cause volatility in the near term."
- Wunderlich's price targets are "based on historical metrics that may have little relevance in the future."
Notably, this was a sector report that did not address company specific risk factors.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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