Among my stock picks this year, Newcastle Investment Corp (NYSE: NCT) may seem to have the greatest risk, but it is a calculated risk and has the potential of very high rewards. It has lost two-thirds of its value since the first quarter of 2007 and I believe has the potential to double if it can just tread water for a couple of quarters. The reason the dividend is so high is that the price dropped due to fear in the market place over its loan portfolio, not a loss of cash flow. The fear is palpable, but is it warranted? I do not think so. On December 28, 2007 NCT closed at $13.08 per share.
Newcastle is a REIT that invests in real estate loans, not the actual real estate, and 90% of those loans are in non-residential projects. Over the past six months, the financial sector has become one big horror story and investors ran from the "financial theaters" in panic. So in my own version of the story, Chasing Value: Newcastle's 21.9% yield too good to be I true?, I decided to play Ghostbusters and tried to make it clear that there is value in NCT. Suppose the yield fell with the stock price as defaults affected cash flow, I could still be very happy with a 7% to 8% yield.
I will summarize here by letting you know I did what homework I could and checked out NCT's recent conference call. This company has averaged an 8.8% yield over the last five years. However, today because the stock is now a third of its recent price, the yield has jumped to 21.9%. Newcastle is standing by this dividend. Actually I think it has to, because REITs are required to pay out most of their profits, and Newcastle has earned 23% over the last fiscal year.
The stock is down because the underlying current market value of the collateral has gone soft in some cases, but mostly it has fallen victim to the generally poor market for various classes of loan packages, be they Alt-A, subprime CDOs, or Uncle Joe's handshake. According to the latest company data, NCT's current cash flow seems fine, and of that, it claims to have a 60-day delinquency rate of less than 1%.
The PEG ratio is 0.15 (anything under 1.0 is noteworthy) and it is trading at a book value of 0.74. Naturally these are a little distorted because investors have driven down the stock price in anticipation of a cash crunch that they fear will occur down the road. If the market's fears are exaggerated, then NCT may get a big bounce. Since all the scared money is out of this stock, I do not anticipate a rebound until some of that billion dollars shows up and investors migrate back later in the year.
You can see from the five-year stock chart that the stock is two-thirds off its highs, and less than it was five years ago. I was not able to find any questionable practices by management although I do not have a group of sleuths to dig very deep. While I am recommending investors give this stock consideration and I have recently acquired shares in numerous portfolios, it is a more risky position than most. Readers should also consider that I have included the stock in a group of eight that I consider to be generally conservative picks. If you are new to the market and buying only one stock, Newcastle should not be it.
On the most recent conference call, management claimed a book value after being marked-to-market of $15-to-$16 a share. This is a strong value proposition. This stock may or may not return to its highs in the coming year. However, NCT just has to keep its doors open to be a success story.
If NCT just stays in business and claws its way back a couple of bucks, the return on investment will be outstanding. On the downside, if the dividend was cut and the stock went nowhere, there is a good chance it will still beat all the indices.
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Disclosure: I own shares of NCT.
To find potential opportunities and verify my track record read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm.
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