Stock Traders Who Get Investing Tips On Reddit Are Still Looking For The Next Gamestop moon shot. One company that was talked about recently – Invesco Mortgage Capital (NYSE: IVR)… Earlier this month, the company’s share price jumped 15% in hopes that short squeeze…
Experienced stock investors know that betting on short squeezes is generally not an option. Most investors perform much better by buying shares of strong companies with good fundamentals.
Mortgage REITs have a different business model
Invesco Mortgage Capital is a mortgage real estate investment fund (REIT). Unlike most REITs, which invest in real estate and then rent it out, mortgage REITs invest in real estate debt; in other words, mortgage-backed securities and similar assets. These companies are more like banks than a REIT mall or a REIT office. They borrow money (similar to how banks accept deposits) and then buy mortgage-backed securities (similar to how banks make loans).
Invesco Mortgage Capital specializes primarily in mortgage-backed securities guaranteed by the US government. The company also has a part of its investment portfolio (about 8%) in non-guaranteed mortgage-backed securities. The weighted average portfolio return is 1.95%. Invesco Mortgage borrows money at 0.15%, so its NIM is 1.8%.
Invesco Mortgage Capital had a near-death experience
Mortgage REITs usually make money gradually, although they can lose money quickly, as we saw last year around this time. In 2020, when the country found itself in economic isolation caused by the pandemic, the market for mortgage-backed securities froze. Mortgage REITs faced margin calls and many were forced to liquidate large chunks of their portfolios at bargain prices.
Invesco Mortgage Capital was one of the mortgage REITs hit particularly hard and ended up in a leniency agreement with its lender banks. Although the company was able to get out of tolerance, its business operations were drastically reduced at the expense of costs.
Invesco Mortgage Capital is now a completely different company
Invesco Mortgage Capital entered 2020 with $ 22.3 billion in assets and $ 2.9 billion in capital. The company exited 2020 with $ 8.6 billion in assets and $ 1.4 billion in capital. Invesco Mortgage sold its entire portfolio of commercial mortgage-backed securities (CMBS) for $ 8.6 billion. It is a mortgage provided to institutions to buy buildings, not to individuals to buy a home. During the credit crunch in the early days of the pandemic, these CMBSs were highly illiquid. Invesco Mortgage decided to focus its portfolio on government-backed mortgage-backed securities, which recovered fastest in the early days of the pandemic.
Invesco Mortgage Capital is a completely different and smaller company than it was when it entered 2020. In February 2020, stocks were four times higher than they are now. Since mortgage REITs are usually traded based on book value per share and dividend yield, it will take years to return to these levels naturally. Invesco Mortgage is trading above its book value of $ 3.65 per share as of March 31, 2021.
Investors hoping for a short-term contraction in stocks are likely to be disappointed. The company issues stock, and the business fundamentals are defying rapid growth. If anything, Invesco Mortgage Capital is a much more conservative company than it was a year ago, and generally conservative business models emphasize increased security ahead of faster growth. Invesco Mortgage Capital should be purchased at the rate of 8.8%. dividend yieldrather than hoping it will quickly become a $ 16 / share stock again.
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