Will Newcastle Investment Remain a Steady Investment?

With shares of Newcastle Investment Corp. (NYSE:NCT) trading at around $10.55, is NCT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The best way to understand Newcastle is to read the following excerpt from its website: “Newcastle Investment Corp. is a real estate investment and finance company located in New York City. The Company owns a diversified portfolio of debt predominantly secured by commercial and real estate. The Company seeks to utilize match funded financing strategies to increase returns to shareholders and minimize its exposure to refinancing and interest rate risks. The Company is taxed as a real estate investment trust.”

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There have been many positive developments for Newcastle recently. These developments include:

  • Four insider purchases since the beginning of the year totaling 404,900 shares
  • 30 percent stake taken in consumer-loan portfolio from HSBC Finance
  • Robust revenue growth
  • Focus on diversification
  • Partnership with Nationstar Mortgage Holdings Inc. (NYSE:NSM)
  • Credit Suisse Group AG (NYSE:CS) recommends Buy on recent weakness
  • Boosting mortgage servicing business

In regards to the 30 percent stake in the consumer-loan portfolio from HSBC Finance, the cost was approximately $3 billion. The portfolio consists of more than 400,000 loans: 70 percent unsecured/30 percent personal-homeowner. These loans have an average debt balance of $9,500 and an expected lifespan of three years.

The partnership with Nationstar Mortgage Holdings will help Newcastle enhance its mortgage servicing business. As a team, Nationstar and Newcastle will buy rights from Bank of America Corporation (NYSE:BAC).

Credit Suisse expects Newcastle’s excess mortgage servicing rights, or MSR, to return 16 percent. More than half of Newcastle’s MSRs are non-Agency. Prepayment speeds have been modeled at 23 percent to 30 percent on its Agency portfolio. Credit Suisse has an $11.50 price target on Newcastle.

The chart below compares fundamentals for Newcastle, Vornado Realty Trust (NYSE:VNO), and Lexington Realty Trust (NYSE:LXP). Vornado is the largest company of the three; Newcastle and Lexington are similar in size. Newcastle has a market cap of $2.66 billion, Vornado has a market cap of $16.18 billion, and Lexington has a market cap of $2.26 billion.

NCT

VNO

LXP

Trailing   P/E

3.57

29.43

12.87

Forward   P/E

7.19

16.51

11.29

Profit   Margin

90.08%

19.37%

52.28%

ROE

68.64%

4.67%

14.29%

Operating   Cash Flow

$97.33 Million

$825.05 Million

 $163.81 Million

Dividend   Yield

8.10%

3.30%

4.90%

Short   Position

1.50%

2.00%

12.90%

 

Newcastle is exceptional in the fundamentals department. The 8.00 percent yield is especially enticing. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Newcastle is considerably weaker than the industry average of 0.90. It’s also considerably weaker than the debt-to-equity ratios for Vornado and Lexington. Though high debt-to-equity ratios are normal for REITs, there is room for improvement in this area.

Debt-To-Equity

Cash

Long-Term Debt

NCT

2.62

$232.06 Million

$2.81 Billion

VNO

1.32

$960.32 Million

$11.64 Billion

LXP

1.41

$34.02 Million

$1.88 Billion

 

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T = Technicals Are Mixed

Other than the past month, Newcastle has outperformed Vornado and Lexington for every time frame listed below. Newcastle also offers the highest yield at 8.10 percent. Vornado currently yields 3.30 percent, and Lexington currently yields 4.90 percent. To see a company outperform its peers while also offering the highest yield is rare and impressive.

1 Month

Year-To-Date

1 Year

3 Year

NCT

-6.83%

24.08%

88.25%

253.20%

VNO

4.11%

9.21%

13.64%

23.71%

LXP

2.31%

16.31%

48.51%

101.30%

 

At $10.55, Newcastle is trading below its 50-day SMA, and above its 100-day SMA and 200-day SMA.

50-Day   SMA

10.97

100-Day   SMA

9.96

200-Day   SMA

8.78

 

E = Earnings Have Been Inconsistent          

Revenue and earnings have both been inconsistent through the years. However, Newcastle has delivered healthy profits over the past three years.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

468.87

361.87

301.98

294.20

330.53

Diluted   EPS ($)

-56.81

-4.23

10.96

3.65

2.94

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

75.46

74.90

82.44

90.40

82.80

Diluted   EPS ($)

0.34

0.68

0.21

1.63

0.42

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Improvements in the economy, specifically the housing sector, have helped aid the industry. Many companies are now receiving upgrades and increased price targets. However, nobody knows for sure if this is yet another bubble.

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Conclusion

Newcastle offers excellent valuation, strategic management, a great yield, and exceptional stock performance over the past three years. The biggest risk is a downturn in housing or the global economy. Newcastle has a lot of potential to move higher, but that potential comes at a risk considering Newcastle isn’t resilient to weakening economic conditions. The rewards outweigh the risks at the moment, but a trailing stop is highly recommended.

Newcastle is an OUTPERFORM.

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