The Sell-Off in Western Asset Mortgage Capital Is Way Overdone

When the market overreacts, that’s a value investor’s chance to jump into action. The fiscal impact of the novel coronavirus on real estate investment company Western Asset Mortgage Capital (NYSE:WMC) stock has been substantial.

WMC Stock: The Sell-Off in Western Asset Mortgage Capital Is Way Overdone
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But did WMC stockholders go too far in dumping their shares?

Western Asset Mortgage Capital’s diversified investment portfolio includes residential whole loans, commercial whole loans and other assets in the real estate financing niche. The real estate market came under pressure during the initial spread of the coronavirus, so it’s understandable that the company’s shareholders had a case of the jitters.

There’s no denying that Western Asset Mortgage Capital will need to be proactive in navigating a challenging real estate market. Still, an argument can be made that the company is taking decisive action to conduct damage control.

A Closer Look at WMC Stock

Once upon a time, WMC stock was priced at more than $20. That was around seven years ago, and by early 2016 the shares were trading at around $10. For four consecutive years, WMC was trapped in a range between $8.50 and $11.50.

Then the coronavirus upended the economy and WMC stock tumbled. The decline in share price was truly breathtaking. From Feb. 20 to April 3, WMC fell from $11.28 all the way down to $1.45. Lately, the bulls have struggled to get the price back above $3.

With the stock down more than 70% from 2020’s high point, traders could see WMC stock as a good value now. Or, they might choose to view it as a proverbial falling knife. An objective look at Western Asset Mortgage Capital may convince you to put the company on your radar as the situation might not be as bad as it seems.

The Upside of a Lost Dividend

It’s typically interpreted as bad news when a company that had previously paid dividends decides to withhold them. Real estate stocks are often known for paying generous dividends. That’s a major part of the sector’s appeal for some income-focused investors.

Thus, long-term WMC stockholders may have felt some frustration when Western Asset Mortgage Capital announced that the company will withhold its dividend payouts for the second quarter.

Even if this move inspires the ire of dividend investors, they should appreciate the rationale. The idea is to “preserve liquidity,” as Western Asset Mortgage Capital put it. As the company navigates through the real estate market’s rocky recovery, maintaining as much capital as possible is a perfectly reasonable objective.

When the Market Falls, Get Small

Along with the dividend suspension, Western Asset Mortgage Capital is slimming down in order to shore up its capital position. CFO and Treasurer Lisa Meyer provides more detail as to the company’s recent actions in this endeavor:

“Since [the first] quarter end, we continued to selectively sell assets to reduce leverage, selling approximately $454 million in securities, mainly Agency MBS, and $149 million in whole loans. We expect that by the end of the second quarter, our leverage will be in line with pre-crisis levels.”

Will a fiscally smaller Western Asset Mortgage Capital thrive in the second half of 2020? That’s probably too much to ask for, but judging by the first-quarter data, it’s reasonable to think that things can only get better from here.

To be frank, it was a brutal quarter for the company. During that time frame, Western Asset Mortgage Capital posted a GAAP net loss of $381.9 million. That amounts to $7.15 per basic and diluted share. It’s a staggering loss as WMC stock was only worth around $11 prior to the pandemic.

The Bottom Line

It’s not a great argument, but the first quarter was so bad for Western Asset Mortgage Capital that a relief rally might be around the corner.

A better reason to own WMC stock today is that you believe the price drop was overdone. Perhaps a slimmed-down Western Asset Mortgage Capital can prove to shareholders that the real estate landscape isn’t as bleak as it seems.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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