Resource Capital Corporation (NYSE:RSO) was my single largest holding. Going into the earnings release, it weighed in at about 20% (maybe even 21%) of my portfolio. The huge allocation to RSO came on the back of extensive analysis on comparable companies and what to expect in the fourth quarter release. Shares rallied dramatically since the call out occurred while shares were at $7.96.
Why Was It Such a Surprise?
When shares rally up by 18% or so for a week, it is fair to say the market was thoroughly surprised by something. In this case, the question is what did RSO do to surprise the market? Their results weren't great - they were simply decent. The issue facing investors was a complete lack of preparation. Perhaps that happened because investors were fed garbage "news" and "analysis."
I want to highlight some of the appalling things passing off as financial news today. This is a problem because Google still links to these sites. They should know better, but they don't. The sites are happy to post this simply because they are looking for any way to generate more page views for advertising and the operating cost of a bot producing what I call "search-spam" is pretty low.
That's Really Terrible
I checked a few news searches for RSO to see what was out there. This is relevant to me because as a large mREIT author, I can occasionally be responsible for as much as 50% or so of the first page of Google News results on a ticker. Yes, that amplifies the reach of my voice. However, looking at the competition explains the dominance. The quote below is so strange, I had to use a screen capture to accurately represent it.
Yes, you're seeing the entries for SITE and [[permalink]] correctly. The one section that appears to be done correctly is the source line at the bottom. I added that in MS Paint to source my image.
Wow, that is terrible.
"Resource Capital Corp. is trading down on a volume of 0.26 million, or 0.6 times its standard daily volume. Shares have dropped -1.16% to $8.5. It has gained $5.23 (-38.07%) since hitting a 52-week high price of $13.73. The stock has moved up across its 50-day moving average of $8.46. The trade volumes are expected to remain volatile during earnings announcement period, as many investors would reconsider their investment in Resource Capital Corp. based on the results."
That seems exceptionally useful. It is like small highlights from a verbal quote screen passed off as if it were news.
Terrible Goes to Worse
The only thing worse than the terrible non-stories is the insane abundance of stories that came from "lawyers are investing RSO." It seems every time a company misses hard on earnings and drops dramatically every law firm seeing it wants to post their own news release to encourage people to talk to them. Why not? It is quite literally free advertising for them. For the companies broadcasting the announcement, it is potentially free revenue since they are just hoping to display a few advertisements.
The eventual case was that after I mostly shut my mouth on RSO for a while, the news outlets were completely overwhelmed with nothing but garbage stories. Investors scrolling through Google News or reading all the entries on Yahoo Finance would find nothing of value. Consequently, they were just left seeing a REIT with a low yield and no idea what was going on. With the cost of doing due diligence being so high (in terms of hours dedicated), most would just pass.
Where Does RSO Stand?
RSO last traded at $9.38. That puts them at about a 66% price to Q4 book value ratio. Since management indicated that they were not expecting to need further impairments in revaluing the portfolio, it is quite possible that Q1 2017 book value should be roughly flat or perhaps slightly higher. Consequently, new adjustments to the portfolio value are not as necessary as they would be for several other mortgage REITs.
At this price I think RSO is still attractive, but not attractive enough to warrant something as crazy as 20% of my portfolio. I'm still heavily overweight on RSO, but I captured some of the gains.
Other mortgage REITs don't trade that this kind of discount. The best comparable is Blackstone Mortgage Trust (NYSE:BXMT) which has been trading between 110% and 120% of trailing book value. In my view, BXMT appears to be a material stronger commercial mREIT. However, the difference in price is absolutely massive. I'm not interested in paying the premium on BXMT, but I am happy having RSO as an overweight position in my portfolio.
This is your opportunity to lock in prices at $300 per year before the next price increase on April 1, 2017. Rates are going up because of the high cost of providing such detailed analysis. By signing up today, your price is locked in against future increases. If you want to learn more about investing in high yield instruments, specifically mortgage REITs and their preferred shares, check out the reviews from my subscribers. In the last month I was able to correctly call the opportunity in shorting Orchid Island Capital (NYSE:ORC) (about a 20% return), shorting Western Asset Mortgage Capital (NYSE:WMC) (for a 6% to 7% return) which included a release when shares hit the target range to close the trade, and buying Resource Capital Corporation (up over 17% in a week) going into the earnings release.
Disclosure: I am/we are long RSO.
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.
Additional disclosure: Do your own due diligence. No financial advice.