Five Star Traders Eyes Two Harbors

Focus: FINANCIALS

Mark Skousen Image Mark Skousen Editor, Forecasts & Strategies, High-Income Alert

Real estate investment trusts are subject to higher interest rates. But, after the recent slow jobs growth report, the Fed isn’t likely to be aggressive in raising rates, says Mark Skousen, editor of Five Star Trader Alert.

Two Harbors Investment (TWO), a New York-based investor in mortgaged-back securities, came up on our radar screen recently.

Because about 70% of TWO's portfolio is non-government-agency mortgages (subprime mortgages), the company has a higher yield (currently 10%) and operates with significantly lower leverage than its peers (3.8-to-one leverage ratio, almost half the 6.2-to-one industry average).

This reduced leverage leaves TWO far less susceptible to interest-rate risk than many others, but the company also faces increased default risk due to the subprime investments.

However, due to much tighter regulations of the sub-prime market, this risk is much lower than it was prior to the financial crisis of 2008.

The mortgage business has been booming. Revenues rose 11% to $600 million last year, and earnings jumped 62% to $353 million. Profit margins are high, nearly 60%.

Earnings estimates by Wall Street analysts have been increasing lately. As a mortgage company, its debt is high, over $16 billion, but it has over $700 million in cash to manage that debt.

TWO is selling for less than 10 times earnings, so it’s relatively cheap -- so cheap, in fact, that a couple of insiders, including CEO Thomas Siering, have been buying shares lately. Let’s join them by buying Two Harbors Investment at market.

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