Therefore, I currently rate ORC as a BUY since the stock is trading at or greater than a (5.0%) discount to my projected CURRENT BV. My current price target for ORC is approximately $8.90 per share. This is currently the price where my recommendation would change to a SELL. The current price where my recommendation would change to a HOLD is approximately $8.00 per share.
ORC’s management team continues to take a more “cautious stance” when it comes to the company’s view that a net increase in mortgage interest rates/long-term U.S. Treasury yields will occur during 2018. ORC continues to maintain a fairly elevated hedging coverage ratio (which was further increased during January 2018), continues to maintain a fairly large structured MBS portfolio (acts as a natural hedge), and continues to focus the company’s pass-through MBS portfolio in higher coupons.
As such, ORC will likely outperform most fixed-rate agency mREIT peers when it comes to valuation fluctuations if long-term rates/yields net increase over the foreseeable future (less of a net BV decrease). However, ORC will likely underperform most sector peers if rates/yields net decrease or remain relatively unchanged (as I correctly projected when it came to BV fluctuations during the fourth quarter of 2017).
Along with the data presented within this article, this recommendation considers the following mREIT catalysts/factors: 1) projected future MBS price movements; 2) projected future derivative valuations; and 3) projected near-term dividend per share rates. This recommendation also considers the high probability of multiple Fed Funds Rate increases by the FOMC during 2018 (this is a more hawkish view when compared to most of last year) due to recent macroeconomic trends/events. This also considers the eventual “wind-down” of the Fed’s balance sheet through gradual “runoff”/partial non-reinvestment (which began in October 2017).----------Seeking Alpha article today
Everything I write is my opinion based on what I read from the companies I post about. Decide for yourself because it's your money.
