I am always on the hunt for bargains in the stock market. My biggest gains to date came after the financial crisis of 2007-2008, where I was able to buy a whole host of large cap companies for small cap prices. As the fog of the Presidential election slowly lifts from Wall Street, I believe now is the time to start seriously digging for woefully undervalued stocks. Although there are several companies on my watch list as strong value stocks, I believe the two stocks discussed here will prove to be truly remarkable in terms of return on investment for 2013 and beyond. And this belief is predicated on a faster than expected rebound in the U.S. housing market.
Armour Residential REIT, Inc. (NYSE:ARR). Armour Residential is a Florida-based mREIT established in 2008. Per their website, Armour invests in hybrid adjustable rate, adjustable rate and fixed rate residential mortgage-backed securities issued by or guaranteed by U.S. Government agencies or U.S. Government sponsored entities such as:
- Federal National Mortgage Association (Fannie Mae);
- Federal Home Loan Mortgage Corporation, (Freddie Mac); and
- Government National Mortgage Administration, (Ginnie Mae).
A week ago, the entire mREIT sector experienced a flash crash due to tax rate concerns on dividends and tightening spreads, taking ARR down with it on very high volume. The mini-crash in the sector has since subsided, with many mREIT's recovering in short order once investors began to realize the sky wasn't, in fact, falling.
I think ARR is an excellent value pick for 2013 for four reasons:
1. Current dividend yield is approximately a whopping 16%.
2. Insiders have been buying of late.
4. Shares of ARR are presently trading under book value at $6.77 a share.
The stock has already priced in a drastic cut to the dividend, but even an unworldly reduction of 50% still gives a yield of 8%. A drastically reduced dividend yield in ARR would therefore still beat many more conservatively financed REITs, with the added benefit that ARR pays out monthly. Given that few stocks can offer a double-digit yield, a monthly distribution, and the strong potential for capital appreciation, Armour Residential is my top value pick for 2013.
Synovus Financial Corp (NYSE:SNV). Synovus Financial Corporation is a financial services and bank holding company with branches throughout the Southeastern United States. Synovus offers commercial and retail banking, financial management, insurance and mortgage services.
The story of SNV is quite interesting. After being one of the most profitable small, community-based banks in the Southeast for over a decade, the company imploded in 2008 due to the housing crisis. The stock plummeted from over $30 a share to under $2, where it languished for some time. Synovus began turning the corner in 2011, however, by paring down its loan losses. Recent quarters, in fact, have shown a return to modest profitability of 2 cents a share (3rd Quarter data). The stock has responded in kind by gaining over 18% in the last three months, and looks to be going much higher. With improving housing numbers possibly coming down the pike in 2013 (see above), SNV holds the clear potential to be a multi-bagger in short order. At worst, the stock may stall at current levels, which would still give investors a decent dividend yield of approximately 1.80% for holding. Like ARR, SNV is also trading under book value at $2.35 a share. Synovus Financial Corp is my second favorite value stock for 2013 and beyond.
Disclosure: I am long ARR, SNV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.