Over 100 leading financial services companies participated in the third annual Deutsche Bank Global Financial Services Conference. After listening to their presentations, talking to executives in the industry and then crunching the data, Deutsche Bank was able to come up with a list of top stocks to buy in this recently beaten down sector. We recently have written about how many of the mortgage REIT stocks have been taken to the woodshed over fears that their mortgage holdings will decline in value in a rising interest rate environment.
Here are some positive real estate finance stocks from the Deutsche Bank list.
Northstar Realty Finance Corp. (NYSE: NRF) is the top pick for investors to buy at Deutsche Bank. The firm thinks the company is well positioned to grow its cash flows and benefit from new investment opportunities as the company 1) adds new manufactured housing investments, 2) grows the asset management business, and 3) deploys capital into opportunistic investments such as new private equity fund interests. The Deutsche Banks price target for the stock is $12. The Thomson/First Call estimate is at $10.50. Investors are paid an 8.35% dividend.
Two Harbors Investment Corp. (NYSE: TWO) is expected to benefit from new investment initiatives as the company increases the mix of credit sensitive loans and begins investing in mortgage servicing rights (MSRs). During its presentation, the company stated current book value was basically unchanged from March 31, given the defensive positioning against rising interest rates, lower leverage and positive marks on credit sensitive assets. Deutsche Bank has put a $14 price target on the stock, while a consensus target was not found. Investors are paid an 11.52% dividend.
CYS Investments (NYSE: CYS) management expects the Fed to stay consistent with its mid-2015 forward rate guidance, which creates an attractive steep curve environment and cheap financing for the next two years. Deutsche Bank has a $13 price target, and the consensus is at $13 also. Investors are paid a large 13.38% dividend.
Home Loan Servicing Solutions Ltd. (NASDAQ: HLSS) also was upgraded to buy yesterday at Ladenburg Thalmann. The company focuses on owning subprime MSRs and associated advances. Deutsche Bank believes they face minimal interest rate risk and no credit risk. Subprime prepayments are largely insensitive to changes in rates, and they expect prepayment speeds to remain slow. The Deutsche Bank price target is $25.75, and the consensus target is at $24. Investors are paid a 6.86% dividend.
KKR Financial Holdings LLC (NYSE: KFN) is expected to grow its natural resources strategy and benefit from credit opportunities in Europe. New risk retention rules in Europe are likely to decrease competition and create an attractive investment and collateralized loan obligations (CLO) environment. Deutsche Bank has a $13 price target, and the consensus is at $12. Investors receive a 7.77% dividend.
Western Asset Management Capital Corp. (NYSE: WMC) is another hybrid mortgage REIT. Beside, investing in residential agency and non-agency MBS, the company also is invested in commercial mortgage-backed securities and other asset-backed securities. This wide variety of assets provides the company with enough diversification to survive the volatility in interest rates. Deutsche Bank has a $21.50 target, and the consensus is right at line at $21.50. Investors receive a gigantic 20.61% dividend.
The main reason for the bear raid on the mortgage REIT stocks was the fear of rising interest rates. While the bond market is an anticipatory device, the fact remains that the Fed has not even begun the tapering of the QE purchasing, let alone raise interest rates. Investors with capital dedicated to aggressive growth and income may be well served to nibble on these beaten down stocks. If they start to gain any traction, the short sellers will run for the hills.