From a fundamental perspective, Capstead Mortgage trades on volume of roughly 900, 000 shares per day and possessed a book value per share of $13.58 at the end of the fourth quarter of 2012, down $0.3 versus the prior year end. Based on Friday’s close of $12.27/share, shares of Capstead Mortgage are trading at a 10% discount to their current BVPS. Analysts covering the stock have a consensus outperform recommendation for Capstead Mortgage, with 27.3% of them recommending their investors buy the stock, while another 9% rate the stock outperform. A majority, 64% recommend investors hold the stock.
Apollo Commercial Real Estate Finance
Apollo Commercial, a $500 million company, was organized in 2009 as a mortgage REIT that primarily invests in commercial first mortgage loans, commercial mortgage backed securities and other commercial real estate related debt investments. Apollo has yet to disclose its fourth quarter performance on February 28, 2013.
From a fundamental perspective, Apollo Commercial trades on volume of roughly 205,000 shares per day and is currently trading at a 15% discount to its book value. Analysts covering the stock have a consensus outperform recommendation for Apollo Commercial, with 27.3% of them recommending their investors buy the stock, while another 18.2% rate the stock outperform. A majority, 55% recommend investors hold the stock.
Competition
The aforementioned mortgage REITs are competing with largely followed residential mortgage REITs like American Capital Agency Corp. (NASDAQ:AGNC) and Annaly Capital Management, Inc. (NYSE:NLY). Both have exclusive investments in Agency residential mortgage backed securities. However, the types of Agency RMBS differ within their portfolios. American Capital Agency is invested in lower coupon, low loan balance, HARP eligible mortgage backed securities, which experience lower prepayment speeds, while Annaly Capital Management has a large concentration of high coupon, longer duration mortgage backed securities, which have a tendency to accelerate prepayment speeds for its investment portfolio.
This is why Annaly Capital was forced to cut its dividends during the prior year; however, American Capital remains one of the very few mREITs that have maintained dividends. American Capital is yielding 15.4% and trading at a 3% premium to its book value, while Annaly Capital yields 11.9% and trades at a 4% discount to its book value. However, analysts have a consensus hold recommendation for Annaly Capital, while American Capital Agency is rated as outperform.
Conclusion
I believe the above short-listed stocks and American Capital Agency are the best way to play the US mortgage REITs. These mREITs with elevated divided yields provide the required liquidity as represented by their daily trading volumes, while their attractive valuations provide investors with upside potential, which is also supported by consensus recommendation.
The article Buy These Undervalued mREITs: Offering Upside & Elevated Dividend Yields originally appeared on Fool.com and is written by Adnan Khan.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
