One of the highest-yielding sectors right now is the mortgage REIT sector, where most of these leveraged investments pay out double-digit yields.
These stocks have been hammered this year as yield spreads shifted and earnings and book values fell substantially. Naturally this activity was picked up by Portfolio Grader, and most of these REITs are now graded a “D” or “F.” However, Wall Street has a tendency to throw the baby out with the bathwater, and that appears to the case with some of the mortgage REITs right now.
Pervasive selling has given nearly all of these stocks a quantitative grade of “D” or “F.” Most of the group also has very poor fundamental grades, and should be avoided. However, three stocks stand out with solid fundamental scores and could be positioned to rebound ahead of the sector. Don’t take any action until selling abides and quantitative grades improve, but these high yielders should be on your radar screen.
Two Harbors (TWO) is one of the three REITs with favorable fundamentals right now. Two Harbors is a hybrid REIT that will buy any type of mortgage if it thinks the securities have value. It can buy agency or non-agency paper, adjustable or fixed mortgages and invest in paper all up and down the credit scale. The company earns a “B” for its fundamentals, which could change to an “A” if the analysts would quit downgrading the estimates. TWO yields more than 12% and could be a great holding once the quant grade starts to improve.
Invesco Mortgage (IVR) also receives a “B” for its fundamentals. This REIT has an extra advantage in that it owns turnaround specialist WL Ross, which shares research with its parent. When buying mortgages in the current environment, it really helps to have a distressed investment firm as a research and investing partner. Once again, you should wait for the selling pressure to recede, but with a yield of more than 12% this could eventually be a solid high-yield holding.
Annaly Capital (NLY) is one of the largest and better-known mortgage REITs and has been around since 1996. Management has navigated some difficult times before, so it is reasonable to expect them to emerge from the current market in decent shape. When buyers return to the sector, Annaly’s strong fundamentals could make it a superstar income stock again. The stock has a jumbo yield of more than 13%.
If the fundamentals of these three mREITs remain at grades of “B” or better, they will be outstanding investments once the selling stops and the quantitative grades improve. Use portfolio Grader to wait for you chance to jump on these high-yielding investments.
Louis Navellier is the editor of Blue Chip Growth.