Does Invesco Mortgage Capital's Stock Price Still Have Room To Grow?
Invesco Mortgage Capital (NYSE: IVR) is a mortgage REIT that has gained a lot of attention lately as a short squeeze target that also has a hefty 8.9% dividend yield. The share price reached its highest level in almost seven years when it hit $18.26 just before the pandemic sent it plummeting to a low of $1.95. Many investors are now holding out for the stock to start returning to its pre-pandemic price. How Invescos Business Has Changed: Before the pandemic, the company invested heavily in non-agency mortgage-backed securities (MBS). This type of asset provides higher returns than agency MBS, but also comes with higher risk since they arent backed by the federal government. The company had a book value per common share of $16.29 at the end of 2019, and its stock traded pretty close to that value until that point. Invesco uses low interest short-term debt to invest in long-term mortgage loans. Once the pandemic hit, the company started receiving several margin calls from its lenders. Invesco quickly ran out of money and had to notify the lenders that it couldnt make the payments, leaving them forced to liquidate a significant portion of their portfolio at heavily discounted prices. By the end of the first quarter of 2020, the company had a book value per common share of $5.02 and cut dividends down to 2 cents per share. Invesco has made some major changes to its portfolio and balance sheet since the unexpected disruption brought on by the COVID-19 pandemic. After meeting the margin calls and reducing overall debt, the company transitioned its portfolio to be made up almost entirely of agency MBS. The company has made substantial progress in rebuilding, raising its core earnings per share from six cents during the third quarter of 2020 to 11 cents for the first quarter of 2021. Dividends have also increased the last three quarters, with the most recent payment being 9 cents per share. See How to Invest in REITs  Where Invesco Stands Today: While earnings are still a long way from the 52 cents per share the company had at the end of 2019, the fact is that Invesco Capital Mortgage simply isnt the same company it was 18 months ago. The company has less than half of the assets it had before the pandemic, with $9.76 billion in assets as of March 31, 2021 compared to $22.34 billion at the end of 2019. Also, while the companys agency MBS portfolio comes with less risk and more liquidity, it provides lower returns and has a lower valuation. With a share price of $4.03 at the close on June 21, the stock is already trading at a roughly 25% premium to its current book value. I believe this price level is about the highest the market is going to let this stock hit unless the book value increases over time. Invesco offers a good income investment opportunity at its current price for investors that understand the risks associated with mortgage REITs. However, its highly unlikely the stock will come anywhere near its pre-pandemic price simply because it isnt the same company it was then.