By Thomas E. Sobon
A stock's performance in the market is determined by the confluence of three factors: (1) the company's fundamental situation extant as determined by its business base and the merits (demerits?) of management's corporate development program, (2) the stock's technical status as indicated by its performance on the chart, and (3) the news flow as it relates to both the market in general and, more specifically, to the company. The recent news flow shows two developments that are worthy of note by investors interested in the RAIT Financial Trust (RAS): a larger than expected increase in the stock's dividend and a sharp increase in its trading volume.
What follows is a brief update of the two previous articles that I wrote on RAIT. The news flow is the wild card among the three items cited because its occurrence is the growing edge of the future and its content is usually unpredictable with regard to content and timing. It is this that I am concentrating on in this article. I am satisfied that the company's fundamental story as set forth in my previous articles remains as stated and needs no further elaboration at this time. Interested readers may want to read those articles to better understand the reason for my current recommendation which I hope will be timely. The first article was last November's "What Can Go Right with RAIT" and the second, February's "RAIT's Turnaround Gains Momentum." The technuical status of the stock will be addressed below by an update of its chart.
The significance of the recent news flow:
On Monday March 17, RAIT increased its dividend to 12 cents per share from the previous quarter's 10 cents. This was the sixth increase in the past two years. The 20% increase in the dividend came as a surprise to the market and the stock finished the day at $7.82, up almost 6% from its previous close of $7.39. It has now broken $8.00 on the upside. In articles I write here on Seeking Alpha, I simply write the article, tell the reader what I am doing with the stock, and remind him or her that it is up to them to make their own decision regarding its investment merits according to their own investment criteria.
Upon seeing the news release I chose to add to my position by buying a few more shares at $7.43 at the opening of trading on Monday morning. The reasons I did so were as follows: (1) until late-2012 RAIT's ability to earn fees from loan originations was constrained because of financial sourcing limitations. Those were lifted in Q4 from new sourcing arrangements with banking institutions and a $57 million offering of common stock. While $98 million of CMBS loans were sold in all of 2012, $57 million (or 58% of that total) occurred in Q4. The fee incomes from those respective numbers were $6.2 million and $3.8 million (the latter was 61% of the yearly total). When the company got access to new funding sources at the beginning of Q4, the CEO said that there were no longer any financial constraints on its lending activities so "it would be full speed ahead." The CMBS result referenced shows that he wasn't kidding. The Y/Y results from CMBS loans in the first three quarters in 2013 will compare very favorably with the $41 million reported last year. Complementing the gain from loan originations will be (1) a Y/Y gain from multifamily housing operations where occupancy and rents have both been increasing and (2) a burn off of interest rate hedges that are no longer needed because variable rate loans are being used in lending operations. These considerations plus the larger than expected increase in the dividend indicated to me that the company's AFFO in 2013 will likely be better than generally expected. The analysts who follow the stock have just increased their consensus AFFO estimate from $1.34 to $1.38, which would be a gain of 25% from the $1.10 achieved in 2012.
Technically, what's going on with the stock?
Let's look at the chart I constructed from data in my workbook. Its salient features are explained in the notes below it.
(1) The bold black line on top is price and the bold pink line below it is relative strength. (2) The dotted lines are moving averages and there is a set of those for price and a similar set for relative strength; they are used to define trends and reversals. (3) The five sets of gray parallel lines that frame the stock's price action are 22-day trading ranges and their progression shows how the trading range shifted during the 110 days charted. And (4) the four wavy blue lines that straddle relative strength are Bollinger Bands and they are used to detect overbought or oversold situations. Any one of the items listed as (2) to (4) is independent of the other two and could be considered as a valid technical indicator for making buy or sell decisions.
The price and relative strength lines were at or above their respective moving averages throughout the 110 day period charted as the stock outperformed the market. The progression of the five trading ranges was steadily upward. And whenever the price spurted upward to penetrate a Bollinger Band to indicate an overbought situation, the stock merely consolidated until it was once again positioned to trend higher. Overall, this remains a bullish chart.
The volume of trading in the stock has been heavier than normal and that plus the sharp rise in the stock's price suggest that institutional buying is back with a vengeance. Until recently, institutions own about 47% of the 58 million shares outstanding and the short interest amounts to 4.7%. Whereas institutions were net sellers of RAIT until three months ago, they turned bullish on the stock and have since become net buyers. With RAIT doing as well as it is I would not be surprised to them take a more positive stance on the stock going forward. If so, they would be taking supply off the market while increasing demand which would have a salutary effect on price. I wrote about the large short interest in the stock in my first article. I didn't understand why anybody would short the stock then and I don't understand why now. Even if the short sellers were "short against the box" their positions are proving costly to them because of the opportunity costs involved.
I continue to rate the stock a buy at the current price of $8.12 because (1) earnings growth for 2013 is well defined and the stock is priced at just about 5.9 times earnings, (2) the current dividend yield is 5.9% but the run rate should increase to at least 7.4% by year end, (3) the stock's price chart is bullish, and (4) the prospect of institutions becoming net buyers instead of net sellers would auger well for the stock's price.
I will continue to write progress reports as needed up until the time I sell my position.
Disclosure: I am long RAS.