New Residential: A Peter Lynch-Type PEG Play

07/17/2018 5:00 am EST

Focus: REITS

John Reese

CEO and Founder, And Validea Capital Management

John Reese selects stocks based on a detailed historical analysis of the strategies of many of the stock market's most legendary investors. In his Validea newsletter, he looks at a top-ranked REIT based on noted fund manager Peter Lynch's price-to-earnings growth (PEG) strategy.

New Residential Investment Corp. (NRZ) is a real estate investment trust; its portfolio includes mortgage servicing related assets, residential mortgage backed securities, residential mortgage loans and other investments.

Under the Peter Lynch strategy, this stock would be considered a "fast grower". The investor should also examine the P/E (4.02) relative to the growth rate (24.79%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.

This is a quick way of determining the fairness of the price. In this particular case, the price to earnings growth ratio (PEG) for NRZ (0.16) is very favorable.

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. NRZ, whose sales are $2,687.7 million, needs to have a P/E below 40 to pass this criterion. NRZ's P/E of (4.02) is considered acceptable.

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for NRZ is 24.8%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. NRZ's Equity/Assets ratio (26.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. NRZ's ROA (7.05%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

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