Tim Bovee, Private Trader: STWD Analysis

Update 8/10/2016: The next ex-dividend date is Sept. 28 and I have re-entered the position for $22.38 per share. Exiting for the earnings announcement carried a lost opportunity cost of $1.14.

Update 7/18/2016: With the July 11-Aug. 19 earnings season at hand, I exited STWD to free funds for short-term speculation after collecting a dividend on June 28. I shall consider re-entering a position in STWD after the earnings season is over. The next ex-dividend date will be in late June or early July, allowing a broad window for re-entry.

Shares rose by 8.1% over 73 days, or a +40% annual rate. The shares plus dividend produced a 10.5% yield on debit fora +53% annual rate.

Starwood Property Trust Inc. (STWD), an affiliate of the closely held Starwood Capital Group headquartered in Greenwich, Connecticut, is a real-estate investment trust specializing in commercial properties,

I considered STWD as a dividend play and bought shares on Friday, May 6, without a full analysis. I need a place to park money that isn't committed to my more lucrative volatility strategy during this time of low implied volatility.

[STWD in Wikipedia]

Supply and Demand Investing
by Clair Edward Leedom III

STWD

The Company

Like all REITs, STWD is required to payout 90% of earnings as dividends, a relationship called the Dividend Payout Ratio. STWD has a ratio of 102.7%.

Analyst enthusiasm is positive, coming down collectively at a 50% enthusiasm rating.

The company reports return on equity of 9%, with debt running at 146% of equity.

Earnings have been profitable in all of the past 12 quarters. Ten quarters have produced upside surprises. The most recent of the downside surprise was this year's 1st quarter.

The earnings yield is 7.38%, compared to a 1.75% yield on 10-year U.S. Treasury notes. The dividend yield is 9.51% annualized at today’s prices.

The "fair" price implied by earnings growth estimates is $31.62 per share, compared to the market price of $20.18 per share. The market price is 36.17% below the implied price.

The stock is selling at 13.5 times earnings and also at a premium to sales. It takes $6.34 in shares to control a dollar in sales.

Institutions own 73% of shares.

STWD next publishes earnings on Aug. 2. The stock goes ex-dividend on June 28 for a quarterly payout of $0.48 per share.

On average STWD trades 1.7 million shres per day with a one cent bid/ask spread.

Decision for My Account

I bought shares of STWD on Friday, May 6, for $19.65 per share.

The dividend is attractive and the fundamentals are good. The stock is underpriced by the PEGY standard. The biggest risk, in my opinion, is the general risk of a return to recession, an event that ought to have sufficient warning to allow for an orderly exit.

Exit Strategy

I've set my original exit point according to the one standard deviation mark, using the same options series, the JUN, as I would use for a short-term trade. That sets a lower bound of $18.07, or $1.58 below the entry price.

The share price has dropped on each of the last four ex-dividend dates, a normal behavior for high-dividend plays. The average decline has been $0.54; the maximum, $0.70; and the central tendency, with the outliers eliminated, $0.63.

I shall update the lower bound according to the current standard deviation as the next option series comes into play on the calendar. By my rules, I change option series when the current series falls below 30 days until expiration.

I'll update this post when the exit point changes.

-- Tim Bovee, Portland, Oregon, May 10, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.

I can be reached via comments on Private Trader posts or by email at datnillc@gmail.com.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.