Is the housing market recovering? 3 undervalued residential REITs

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By James Dennin for Kapitall.

New home sales fell more than expected this month , and May's numbers were revised downward. Taken together, the two readings suggest a housing market that is still troubled. 

However, Matt Phillips of Quartz isn't "sweating it,"  according to a Tweet he posted Thursday morning, pointing out that the long-term trend is actually pretty stable. 

Truila's housing barometer , which tracks five different measures for housing growth, paints a slightly better picture. Four out of the five measures-home sales, mortgage delinquencies, construction starts, and home-price levels-are all normalizing. 

Only one metric-youth unemployment, described here as workers aged 24-35-has struggled consistently over the last year to gain momentum. Its disproportionate effect on the housing market makes sense because that demographic previously invested most in new homes. 

In case there is undue pessimism about the housing recovery, which  Fortune thinks is already over , we decided to look for some undervalued stocks that could benefit disproportionately from the trend. 

To do that, we looked for  undervalued residential real estate investment trusts (REITs) by looking for companies that had a  trading price well below their Graham number.  REITs are like mutual funds for real estate, which serve as a holding company for various real estate assets. 

We wanted our screen closely correlated to the housing recovery, so we narrowed it to residential REITs and diversified REITs, which hold lots of different kinds of real estate, often including residential properties. 

We then narrowed that list of around 70 stocks to companies trading below their Graham number, which is an approximate valuation of what the stock  should be worth based on earnings and book value. This left us with three REITs on our list. 

Do you think they'll gain momentum if the housing recovery continues? Use the list below to begin your analysis, and let us know what you think in the comments. 

Click on the interactive chart to view data over time. 

1. Capstead Mortgage Corp. ( CMO , Earnings , Analysts , Financials ): Operates as a self-managed real estate investment trust in Dallas, Texas. Market cap at $1.26B, most recent closing price at $13.19.  

Diluted TTM earnings per share at 0.99, and a MRQ book value per share value at 12.65, implies a Graham Number fair value = sqrt(22.5*0.99*12.65) = $16.79.

Based on the stock's price at $13.18, this implies a potential upside of 27.36% from current levels.  

2. Starwood Property Trust, Inc. ( STWD , Earnings , Analysts , Financials ): Focuses on originating, investing in, financing, and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments. Market cap at $5.31B, most recent closing price at $23.99.  

Diluted TTM earnings per share at 1.98, and a MRQ book value per share value at 16.34, implies a Graham Number fair value = sqrt(22.5*1.98*16.34) = $26.98.

Based on the stock's price at $23.23, this implies a potential upside of 16.15% from current levels.  

3. Resource Capital Corp. ( RSO , Earnings , Analysts , Financials ): Operates as a specialty finance company that focuses primarily on commercial real estate and commercial finance in the United States. Market cap at $718.3M, most recent closing price at $5.56.  

Diluted TTM earnings per share at 0.35, and a MRQ book value per share value at 6.2, implies a Graham Number fair value = sqrt(22.5*0.35*6.2) = $6.99.

Based on the stock's price at $5.57, this implies a potential upside of 25.45% from current levels.  

(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research, Graham Number data sourced from Google Finance. All other data sourced from Finviz.)

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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