What follows is a list of companies investing in real estate assets that are rated perilously near, or even around, a "sell" (data sourced from Nasdaq). I find that all the firms carry significant risk that will help generate higher returns for the two mortgage REITs if two events occur: (1) full housing recovery and (2) full employment. It is somewhat probable, although not necessary, that these two events will occur over the next two years. KB Home, on the other hand, is already inflated by a multiples basis and is less favorable on the reward side.
Annaly Capital (NLY)
Annaly trades at a respective 31.8x and 7.6x past and forward earnings with a dividend yield of 14.1%. Consensus estimates for Annaly's EPS forecast that it will decline by 24.5% to $1.94 in 2012, grow by 5.7% in 2013, and then fall by 4.4% in 2014. Assuming a multiple of 9x and a conservative 2013 EPS of $2.01, the stock would hit $18.09, rising 16.1%.
The company has had to the cut dividend yield 15% since the second quarter of 2011. Shelf registration of 125M at $16.16 further gives me pause. Management is very vague - frankly, arrogant - about the business, as evidence by the affinity for story telling during earnings calls. While I believe momentum will pick up from a quicker-than-expected, I wouldn't be so quick to jump in the Annaly boat.
Chimera (CIM)
Chimera trades at a respective 5.2x and 6.2x past and forward earnings with a dividend yield of 15.8%. Consensus estimates for Chimera's EPS forecast that it will decline by 28.8% to $0.47 in FY2011 and then by 4.3% and 2.2% in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of $0.42, the stock would rise by 35.5%. Where the multiple goes, however, will largely be a function of guesswork given the amount of behavioral anomalies that go into valuing the business. Chimera is basically the daughter of Annaly and thus comes equipped with the same lack of visibility from its leadership. In addition, the fiasco about the company firing its accounting auditor reinforces this weakness. I believe, however, that the company is worth the speculative investment given that it exaggerates the gains of the broader market. 70% greater volatility than the broader market will help attract bulls as the economy improves.
KB Home (KBH)
KB Home trades at 39.4x forward earnings with a dividend yield of 3%. Consensus estimates for the company's EPS forecast that it will turn positive at $0.15 in 2013 and then surge to $0.87 in the following year. Continued losses in 2012, however, are not adequately made up for with the earnings in 2013 and 2014. In short, I believe the multiples are not justified.
Of the 21 revisions to EPS estimates, 21 have fallen for a staggering net change of -149%. The company is rated closer to a "sell" than a "buy", and I would thus strongly recommend holding out for now. With that said, I believe the company is showing promising momentum in its backlog and is well positioned to grow margins from higher selling prices at the same time that SG&A is trimmed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The distributor of this research report is not a licensed investment adviser or broker-dealer. Investors are cautioned to perform their own due diligence. We seek business relationships with all of the firms in our coverage, but research covered in this note is independent.
