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When you see insiders buying a pullback, it can be a signal that the decline is overdone. One sector that was hit particularly hard is the mortgage REIT stocks. This is because of concerns that the Federal Reserve might start to slow the purchases of mortgage bonds. However, if there is a reduction in bond purchases it is likely to be very gradual since the Fed does not want to roil markets or undo the progress it has made with its policies. Furthermore, it might be a long time before the Federal Reserve "tapers" because plenty of things could happen in the coming weeks and months which could extend current policy and bond purchases.

It seems that some investors took a "sell first" and ask questions later approach to the mortgage REIT sector which offers some very generous yields. Insiders seem to be indicating that the pullback is worth buying at Two Harbors Investment Corp (NYSE:TWO). This company is a real estate investment trust or "REIT", that is focused on investing in residential mortgage-backed securities, and residential mortgage loans.

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As the chart above shows, Two Harbors Investment has been in a solid uptrend for the past few months and the stock recently was trading over $12.50. However, a recent pullback has brought the shares down by about 8% to just around $11.50. This has sparked insider buying at the company which is notable because it comes from two different insiders and also because it is a healthy transaction in terms of size. It's also worth noting that in the past, insiders at this company have bought shares when pullbacks occurred and that shows these insiders appear to be skilled at properly selecting buying opportunities as they occur.

Insiders are buying: On May 23, 2013, William Reid Sanders (a director) bought 5,000 shares at $11.45, in a transaction valued at $57,250. On the same day, James J. Bender (a director) bought 10,000 shares at $11.46 per share in a transaction valued at $114,600. This follows up on other significant purchases made back in November of last year when another pullback occurred in this stock: On November 20, William Roth (an officer) purchased 10,000 shares at $11.08 per share in a transaction valued at $110,800. On November 16, Steven Kuhn (an officer) purchased 20,000 shares at $10.82 per share, in a deal valued at $216,400. This repeated insider buying shows a significant financial commitment and a opportunistic buying pattern that other investors may want to follow. In addition, Two Harbors announced a significant share repurchase program in late 2012, which allows the company to buy up to 25 million shares.

It's worth noting that analysts at a research firm called "Compass
Point" upgraded shares of Two Harbors from neutral to buy, on May 22. This firm has set a price target of $13.25 on the stock, but Maxim Group has a $14.50 price target and FBR Capital has a price target of $14.50. All of these price targets indicate substantial upside from current levels and investors are rewarded with a major dividend payout of roughly 11%, while waiting for a higher share price.

There are some downside risks to consider. If the Federal Reserve policies or other events cause interest rates to become volatile, this could put downward pressure on the mortgage REIT sector. Also, the companies in this industry typically use leverage. By borrowing money at very low interest rates and reinvesting it in higher yielding assets, it can increase returns. However, this can also magnify the losses if asset prices drop. Two Harbors has been successfully managing these types of risks and providing shareholders with very strong returns, so the downside risks appear relatively benign and outweighed by the upside potential that this stock offers. With a high yield, multiple insiders buying, a meaningful share buyback program in place, and with analyst price targets indicating potential for capital gains, this stock is worth considering now.

Here are some key points for TWO:
Current share price: $11.16
The 52 week range is $9.17 to $13.05
Earnings estimates for 2013: n/a on Yahoo Finance
Earnings estimates for 2014: n/a on Yahoo Finance
Annual dividend: $1.28 per share which yields 11.1%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Two Harbors: Insiders Are Buying The Pullback In This Newly Upgraded 11% Yielder