Stock traders who get their investment advice on Reddit are still looking for the next one Game stop Moon shot. One company that has been under discussion lately is Invesco mortgage equity (NYSE: IVR). The company’s share price rose 15% earlier this month in hopes of entry short press.
Seasoned stock investors have learned that betting on short squeeze is generally a long opportunity. Most Investors are far better off buying stocks in strong companies with great fundamentals.
Mortgage REITs have a different business model
Invesco Mortgage Capital is a mortgage Real estate investment trust (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 mall REIT or office REIT. They borrow money (similar to how banks take deposits) and then buy mortgage-backed securities (similar to how banks make loans).
Invesco Mortgage Capital is primarily focused on mortgage-backed securities guaranteed by the US government. The company also holds a portion of its investment portfolio (approximately 8%) in non-guaranteed mortgage-backed securities. The weighted average return of the portfolio is 1.95%. Invesco Mortgage borrows money at around 0.15% so its net interest margin is 1.8%.
Invesco Mortgage Capital had a near death experience
Mortgage REITs generally make money gradually, although they can lose money quickly, as we saw at the time last year. In 2020, when the country entered a pandemic-induced economic lockdown, the market for mortgage-backed securities froze. Mortgage REITs have been hit by margin calls, and many have been forced to liquidate large portions of their portfolios at emergency prices.
Invesco Mortgage Capital was a particularly hard hit mortgage REIT that has signed a deferral agreement with its creditor banks. It could get out of patience, but the costs severely constrained its business.
Invesco Mortgage Capital is a very different company now
Invesco Mortgage Capital started 2020 with $ 22.3 billion in assets and $ 2.9 billion in equity. It left 2020 with $ 8.6 billion in assets and $ 1.4 billion in equity. Invesco Mortgage sold its entire portfolio of Commercial Mortgage-Backed Securities (CMBS) for $ 8.6 billion. These are mortgages given to institutions to buy buildings, not individuals to buy a home. During the credit crunch in the early days of the pandemic, these CMBS were highly illiquid. Invesco Mortgage decided to focus its portfolio on government guaranteed mortgage-backed securities, which recovered the fastest in the early days of the pandemic.
Invesco Mortgage Capital is a very different and smaller company than it was at the beginning of 2020. In February 2020, the stock was four times its price. Since mortgage REITs generally trade on the basis of book value per share and dividend yield, it will take years to rebuild that level organically. Invesco Mortgage will trade above its book value per share of $ 3.65 per share as of March 31, 2021.
Investors hoping for a short squeeze in the stock are likely to be disappointed. The company has issued stocks, and the company’s fundamentals are not a good place for a quick growth story. If anything, Invesco Mortgage Capital is a much more conservative company than it was a year ago, and typically conservative business models emphasize more security than faster growth. Invesco Mortgage Capital should be bought based on its 8.8% Dividend yield, not hoping it’ll get back to $ 16 stock anytime soon.
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