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Sunday, March 18, 2007

Value in American Home Mortgage (AHM)?

Any stock that provides home loans is probably trading near its 52 week low. I have been bearish on two subprime lenders, New Century & Novastar. The question is whether mortgage REITS are currently a value trap? This reminds me of the summer of 2005 when the homebuilders were all trading at forward P/E ratios under 6. July of 2005 was the top in the homebuilder stocks. The difference is now the mortgage REITS are trading at forward P/E ratios under 5 but are at 52 week lows.

One particular REIT I have been looking into is American Home Mortgage (AHM). I believe the 17% dividend is safe. I am even considering purchasing some shares for my own account. The fact of the matter is that AHM has very little exposure to subprime mortgages. AHM opened its portfolio for investors to look over on March 6, 2007. A loan with a FICO score under 620 is considered a subprime loan.

Percent of Mortgage Portfolio
FICO Score Under 620: 1.7%
Subprime Off Balance Sheet Securitized Loans: 1.1%
Subprime Loans Held for Sale: 7.3%
Subprime Loans Held for Investment: 1.3%

Clearly AHM has very little exposure to the subprime market. I would look to get long this stock on any weakness.

30 Comments:

Blogger Ragin' Cajun said...

Good stuff, I just ran found your site and I'm adding it to my Blog Roll

3/18/2007 8:31 PM  
Blogger Big Ben said...

Thanks

3/18/2007 11:31 PM  
Blogger Yannick said...

I am so glad I found out this little gem myself two weeks ago after its stumble. I bought some at 24$ and then I averaged down went it went momentarily just over 20. I couldn't believe the market was punishing a stock with 1% subprime loans so badly. The 15%+ dividend yield was certainly seen as a good margin of safety, even if they had to lower it somehow because of increasing loan payment defaults.

BTW I just added your site to my boorkmarks (found it reading news on yahoo, how did you get there ? -nice work).

3/21/2007 6:07 PM  
Blogger Old Dave said...

Pros:
1. great dividend yield
2. 52-week low
3. 20% insider ownership of stock
4. several insider stock purchases
5. huge short interest: contrarian take - a potential rebound effect
6. low subprime fraction
7. well positioned to handle extensive refinancing needs that are built into the junk mortgage market (web-site, decent interest rates, national presence)

Cons:
1. increased prime rate effects may yet hit the market
2. huge dept:equity (10:1), very vulnerable to coming crunch
3. low market cap, thin volumes
4. relatively young company
5. fairly large Alt-A portfolio
6. house prices could keep dropping, causing depression in new mortgage applications

Risks:
1. dividend yield could decline
2. big institutional investors, which own the other 80% of the stock, could move the price very abruptly if they get wind of trouble
3. hostile takeover, governmental actions with inadvertent negative consequences, global calamities, like Yellowstone explosion, dirty bomb explosion, etc

I'm going to hold my shares, but with a very tight reign.

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