Swap the 11% return for 8.6%
Prepare for graphs, images and tables, because they speak louder than words. The ratings and outlook we highlight here come after Scott Kennedy’s Weekly Updates in the FPI Forum. Your continued feedback is greatly appreciated, so please leave a comment with any suggestions.
Following the decline in NYMTZ (NYMTZ) on 03/14/2022, stocks moved well inside the strong buy range.
We wanted to buy stocks to capitalize on prices. However, our cash position is quite small, so we were looking for another position that we could sell to free up capital. We chose Ready Capital Corp. (NYSE:RC) because it was still in the neutral range (but only by about a penny).
We expected to sell RC at some point and reinvest the proceeds in another common stock. However, we instead decided to focus on buying NYMTZ due to the favorable risk/reward profile. Our investment in RC lasted less than 2 months (from 01/28/2022 to 03/15/2022) and generated a total return of 11.57%. All of the return came from a capital gain as the price-to-book ratio normalized. This matches the RC Buy Alert prediction where we said:
The objective of this transaction is to generate a positive total return, but the main tool should be an increase in the share price. We expect RC to see a recovery in the price-to-book ratio after a dramatic decline since the start of the year.
We could hold NYMTZ to generate income, but our main objective here is to capture the rise in the share price. NYMTZ shares have fallen much faster than other mortgage REIT preferred stocks. The decline is particularly surprising compared to the NYMTM and NYMTN. The following chart is from 03/15/2022 and was taken while we were preparing the Real Time Trade Alert.
Note that NYMZT has a shorter history and the price dipped during the recent downturn. It fell noticeably harder than other preferred stocks. Being a fixed rate stock may have some impact there, but the stock’s shorter history may also play a role in valuation. Basically, the shorter story doesn’t matter.
However, for a computer that trades stocks, it would seem that NYMTZ is more volatile. The standard deviation of price movements for NYMTZ is much higher because it does not include most of 2021 in the sample size. Since it didn’t exist, it couldn’t have any value for that time. This stock history theory is supported by the fact that NYMTL fell harder than both NYMTM and NYMTN. NYMTL’s story begins right at the beginning of July 2021, so it also suffers from a “shorter story”, but to a lesser extent than NYMTZ.
In the meantime, you can also see that our purchase of RC has been excellent. Even though the sector produced a negative return during this period, RC made a double-digit gain at 11.57%. The shares are now trading just around the projected book value.
RC was a great job. It went as planned, despite the decline in the sector. It has delivered double-digit returns and significant alpha versus sector ETFs.
With RC shares trading around the projected book value, they are not “overvalued”. However, they were a suitable target for harvesting. They were no longer in our target buy range and we have other opportunities with significant discounts at target prices.
Among these opportunities, NYMTZ looked particularly attractive as the shares saw a huge decline. I don’t believe the decline is based on fundamentals and the difference between New York Mortgage Trust’s four preferred stock series supports this.
Some investors may find NYMTZ too risky with a preferred stock risk rating of 4, but the risk/reward ratio is excellent. Equities “suffer” from having a fixed rate, but the return is around 8%. I don’t expect rates to rise to the point where this yield is considered low. I am not predicting that NYMTZ will trade above $25.00, but a recovery into the $24.00 range would not surprise me. I predict it will take a few months to two years as investors become more comfortable with interest rates. While I wait for prices to recover, stocks are paying a nice dividend.
The combination of the projected rise in the stock price offers 15.3% on top of a yield of around 8.6% to buy. This gives us expectations of around 24% over the next year. There are many good opportunities today, but it is a awesome a.
The rest of the charts in this article may be self-explanatory for some investors. However, if you want to know more about them, we encourage you to check out our notes for the series.
We’ll end the rest of the article with the charts and graphs we provide to readers to help them follow the common stock and preferred stock industry.
We include a quick table for common stocks that will be displayed in our tables:
Let the pictures begin!
Residential Mortgage REIT Charts
Note: We have been modeling material changes in BV since 12/31/2021 and some management teams have already publicly indicated a material change in BV per share. The chart in our public articles uses the book value per share from the last earnings release. The current estimated book value per share is used to achieve our trading objectives and decisions. It is available in our service, but these estimates are not included in the tables below.
Source: The REIT Forum
Charts of Commercial Mortgage REITs
Preferred Share Charts
Preferred Share Data
Beyond charts, we also provide our readers with access to several other metrics for preferred shares.
After testing a preferred stock series, we decided to try merging it with the common stock series. After all, we are still talking about positions in mortgage REITs. We don’t want to cover preferred stocks without cumulative dividends, so all of the preferred stocks you see in our column will have cumulative dividends. You can verify this using Quantum Online. We have included the links in the table below.
To better organize the table, we needed to abbreviate the column names as follows:
- Price = Recent Stock Price – Shown in Charts
- BoF = Bond or FTF (Fixed-to-Floating)
- S-Yield = Stripped Yield – Shown in charts
- Coupon = Initial Fixed Rate Coupon
- FYoP = Floating Yield on Price – Shown in Charts
- NCD = Next Call Date (nearest stocks could be called)
- Note: For all FTF issues, the floating rate would start at NCD.
- WCC = Worst Cash to Call (lowest possible net cash yield from a call)
- QO Link = Link to Quantum Online Page
Our goal is to maximize total returns. We achieve this most effectively by including “trading” strategies. We regularly trade positions in common stocks of mortgage REITs and BDCs because:
- Prices are inefficient.
- Over the long term, stock prices generally revolve around book value.
- Short-term price-to-book ratios can deviate significantly.
- The book value is not the only step in the analysis, but it is the cornerstone.
We also allocate preferred stocks and equity REITs. We encourage buy-and-hold investors to consider using more preferred stocks and equity REITs.
We benchmark our performance against 4 ETFs that investors could use to gain exposure to our sectors:
Source: The REIT Forum
The four ETFs we use for comparison are:
One of the largest mortgage REIT ETFs
One of the largest preferred stock ETFs
Largest Equity REIT ETF
The REIT high-yield equity ETF. Yes, it was appalling.
When investors think it’s not possible to get strong returns with preferred stocks or mortgage REITs, we politely disagree. The sector is full of opportunity, but investors still need to beware of risk. We can’t just aim for performance and hope for the best. With respect to common stocks, we must be even more vigilant in protecting our capital by regularly monitoring prices and updating estimates of book value and price targets.
- Preferred Stock Bull: NYMTZ
- Neutral on ordinary share: RC