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Two Harbors Investment Corp (NYSE:TWO), a USD$2.73B mid-cap, is a real estate company operating in an industry which remains the single largest sector globally, and has continued to play a key role in investor portfolios as an asset class. Real estate investment trust, or a REIT, is a collective vehicle for investing in real estate that began in the US and has since been adopted worldwide as an investment asset. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year . Is the real estate industry an attractive sector-play right now? Today, I will analyse the industry outlook, and also determine whether Two Harbors Investment is a laggard or leader relative to its real estate sector peers. View our latest analysis for Two Harbors Investment
What’s the catalyst for Two Harbors Investment’s sector growth?
NYSE:TWO Past Future Earnings Jan 12th 18 Issues around rate hikes and yield changes have made investors sceptical of REITs. The capacity for these investment vehicles to absorb a rate hike should be considered, hence, factors such as lease durations and pricing power in the market would require a deeper dive. In the previous year, the industry saw growth in the twenties, beating the US market growth of 10.78%. Two Harbors Investment leads the pack with its impressive earnings growth of over 100% last year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be -43.96% compared to the wider REIT sector growth hovering next year. As a future industry laggard in growth, Two Harbors Investment may be a cheaper stock relative to its peers.
Is Two Harbors Investment and the sector relatively cheap?
NYSE:TWO PE PEG Gauge Jan 12th 18 REIT companies are typically trading at a PE of 10x, below the broader US stock market PE of 20x. This means the industry, on average, is relatively undervalued compared to the wider market – a potential mispricing opportunity here! Though, the industry returned a similar 8.92% on equities compared to the market’s 10.43%. On the stock-level, Two Harbors Investment is trading at a PE ratio of 5x, which is relatively in-line with the average REIT stock. In terms of returns, Two Harbors Investment generated 13.85% in the past year, which is 4.93% over the REIT sector.
What this means for you:
Are you a shareholder? Two Harbors Investment is a REIT industry laggard in terms of its future growth outlook, and is trading relatively in-line with its peers. If your initial investment thesis is around the growth prospects of Two Harbors Investment, there are other REIT companies that are expected to deliver higher growth in the future, and perhaps trading at a discount to the industry average. Consider how Two Harbors Investment fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Two Harbors Investment has been on your watchlist for a while, now may not be the best time to enter into the stock. Its growth is expected to be lower than its REIT peers in the near term, and it is also trading at a PE in-line with these companies. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the real estate sector.
For a deeper dive into Two Harbors Investment’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other real estate stocks instead? Use our free playform to see my list of over 100 other real estate companies trading on the market.
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