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Why Redwood Trust Has Upside To $10+

Jun. 07, 2020 11:56 AM ETRedwood Trust, Inc. (RWT)9 Comments


  • RWT has recovered sharply since the panic low, but there is more left to the upside.
  • Mark-to-market losses will largely be reversed, I believe, creating book value upside.
  • I see conservative book value at $10 to $11, up from $6.32 at the end of March, driving a higher share price.

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The mortgage REIT industry has been turned upside down by the COVID-19 crisis. Some players are struggling to survive, while damage has been somewhat limited to others. One of the smaller players, Redwood Trust (NYSE:RWT), saw almost 90% of its stock market value wiped out in the span of a few weeks earlier this year. While shares have recovered sharply in recent trading days, the stock is still at just $7, down from nearly $18 before the crash. At today’s price, I think there is long-term value to be had with Redwood, and for enterprising investors that understand the risks with this one, it could be worth a look from the long side.

First, some notes of caution

As with any other mortgage REIT, Redwood is not for the risk-averse investor. The trust employs significant leverage to try and borrow at a lower rate than it can invest the proceeds, and while it works most of the time, when things go south, they tend to go south in a hurry.

That’s what investors were afraid of earlier this year as Redwood entered a free fall from $17+ to just $2.14 per share in a very short period of time.

Before we get to why I’m bullish, let’s take a look at some risks that can be represented by historical data. First up, we have total revenue and operating income, both in millions of dollars, for the past five years.

Source: TIKR.com

What we can see is that both revenue and operating income are very lumpy, the product of a variety of factors, including the size of the portfolio, borrowing rates, repayment rates, rates at which funds can be invested, and the list goes on. This huge and complex set of variables makes it difficult to determine with much accuracy what revenue or earnings will look

This article was written by

Josh Arnold profile picture
Leader of Timely Trader
Maximize your gains through live trading with alerts ahead of market trends

I've been covering financial markets for ten years, using a combination of technical and fundamental analysis to identify potential winners (and losers) early, particularly when it comes to growth stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RWT over 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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