New Residential Investment (NRZ) is structured as a mortgage real estate investment trust (mREIT) that focuses on investing in and managing residential mortgage related assets in the United States. The company primarily invests in excess mortgage servicing rights (MSRs) on residential mortgage loans, and in servicer advances. With an investment portfolio of over $18.5 billion and roughly 4 million customers, it operates through three broad segments – Servicing & Origination, Residential Securities & Loans, and Corporate & Others.

NRZ is part of the Robinhood’s list of 100 Most Popular stocks with a 90% Buy rating. With more than 13 million members on its commission-free stock investing and trading app, Robinhood is known for listing the stocks that are most popular among its users. While a stock’s presence on the Robinhood list doesn’t indicate its future growth potential, it gives investors a sense of its popularity among millennial investors.

NRZ has still not been able to recover from the pandemic-led sell-off in March. In the third quarter, core earnings declined 8.8% quarter-over-quarter to $0.31 per share. Net income came in at $0.19 per share, significantly improving over the quarter-ago loss of $0.02 per share. However, it was down 65% from $0.54 in the same period last year. The REIT sequentially increased its quarterly dividend 50% to $0.15 per share. However, it also implied a 70% reduction from the year-ago dividend of $0.5.

Despite favorable regulatory changes and continued Fed purchases of mortgage bonds, the stock has lost 50.9% year-to-date. The recently released financial results and the potential downside based on a number of factors have made our proprietary system to rate NRZ as a “Sell.”

Here is how our proprietary POWR Ratings system evaluates NRZ:

Trade Grade: F

NRZ is currently trading lower than its 50-day and 200-day moving averages of $7.94 and $9.04, respectively, indicating that the stock is in a downtrend. In fact, the stock’s 2.7% loss over the past month reflects this short-term bearishness.

The decline in mortgage rates has driven higher mortgage prepayments and refinancing application volume. This has adversely impacted cash flows that the company collected from excess MSRs. Consequently, the company witnessed a significant decline in MSR valuations during the third quarter.

NRZ recorded a loss of $94.46 million on net settlement of investments in the quarter compared to the year-ago gain of $133.67 million. Moreover, MSR portfolio totaled approximately $571 billion in unpaid principal balance (UPB) for the last reported quarter, compared to the quarter-ago UPB of $610 billion.

Chart Provided by Trading View

Buy & Hold Grade: F

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, NRZ’s positioning is extremely unfavorable. The stock is currently trading 57% below its 52-week high of $17.66.

Looking at the past year, the stock has lost 48.5% due to its weak financials and a change in the nature of its business despite the near-zero interest rates. NRZ’s revenue declined 104.5% over the past twelve months.

Assets have significantly declined over the past six months. The total assets of $44.9 billion at the end of 2019 fell to $30.4 billion as of September 30, 2020. Consequently, NRZ has exited the non-qualified mortgage lending business to focus on government-backed lending. Burned by falling prices on non-agency mortgages, the REIT has decided to focus on liquid securities, at least for the near term. On April 1, the company announced that it entered into an agreement to sell roughly $6.1 billion face value of non-agency residential mortgage-backed securities (MBS) to several buyers.

Peer Grade: C

NRZ is currently rated #11 out of 31 stocks in the REITs – Mortgage industry. Other popular stocks in the group are Ellington Residential (EARN), Cherry Hill Mortgage Investment (CHMI) and MFA Financial, Inc. (MFA). While EARN has gained 11.4% year-to-date, CHMI and MFA have lost 26.2% and 56.5%, respectively, over this period.

Industry Rank: D

The StockNews.com REITs – Mortgage Stocks industry is ranked #116 out of the 123 industries in our database. The companies in this industry invest in residential mortgage pass-through securities and collateralized mortgage obligations. Record-low mortgage rates and a shortage of inventory is driving US housing market prices. The housing market is now as strong as it was in the heat of the housing bubble. Moreover, the Federal Housing Finance Administration (FHFA) extended the moratorium last month for both evictions and foreclosures until the end of the year. By the end of 2020, several million borrowers who have received mortgage forbearance will have gone nine months without making a mortgage payment.

Overall POWR Rating: D (Sell)

Overall, NRZ is rated a “Sell” due to prepayments and refinancing pressure, declining business, short-and-long-term bearishness, and weak price momentum, as determined by the four components of our overall POWR Ratings.

Bottom Line

From the perspective of the economy, the market finds it difficult to believe that the recent real estate boom will continue. Mortgage REITs tend to be riskier than traditional REITs as they own MBS, rather than owning office buildings or retail centers. They also tend to be leveraged investment funds, with assets and liabilities much larger than the market capitalization of their shares. Moreover, MSRs, which accounts for the majority of NRZ’s investments, are expected to continue witnessing headwinds in the coming quarters.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is not favorable for NRZ. The consensus EPS estimate for the ongoing year indicates a 30% fall from the year-ago value. This outlook is expected to keep NRZ’s price momentum dull in the near term, despite being one of the most popular Robinhood stocks.

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NRZ shares were trading at $7.38 per share on Friday morning, down $0.21 (-2.77%). Year-to-date, NRZ has declined -52.24%, versus a 2.33% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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