Ellington Financial deals in the very same products that nearly brought down the entire financial sector. Scarry proposition? Wait until you see the numbers. And, keep in mind that there are so many regulations in place now that it would be nearly impossible to do the same kind of mistakes that were made nearly a decade ago.
Ellington Financial is a company that acquires asset-backed financial instruments. This is exactly the kind of product that got the entire financial world into trouble in 2008. So, how could I possibly even consider analyzing a company that works with that product? Simple: This company works with the same kinds of products that created the financial crisis.
While I would equally be apprehensive to consider adding the product into my portfolio, the sector in the industry has been beaten down so much that it is impossible to even consider not looking at the sector. There is barely any interest in any company dealing with these products. There is absolutely no surprise there. That, however, is exactly the reason to get in to the sector.
Here are the company’s numbers for you to consider, including gross revenue, net profit and earnings-per-share, respectively:
2011: $63.5 $10.3 -$0.50
2012: $63.9 $97.1 $1.32
2013: $85.7 $79.4 $3.35
2014: $93.5 $59.9 $2.28
2015: $101.8 $38.4 $1.31
The biggest concern I have with this is the increase in the revenue, but subsequent drop in earnings. Seems the two should be going hand-in-hand. However, there is not a linear relationship there. There is also an interest expense, the company pays on a spread. Despite the drop over the past year, 2016 numbers are looking to be moving higher. That will translate into the improvements in the earnings per share department.
Also, the stock is trading at just above 10-times earnings. This is a level that I look for when I want to add something to my portfolio. By doing this you are looking at buying in to future earnings at a 10% return. But, the entire equity market is, on average, well roughly 25 times earnings. That is well above historical levels of an average of 15 times earnings. Getting in to stocks at the price-to-earnings ratio invites more risk than, say, buying in to the market at a much lower ratio. With a stock trading at 20-times earnings you are only buying in at 5% return. However, the stock market is averaging a return of about 4% with the ratio so high.
The fact that the rest of the stock market is trading at such a high ratio is exactly what attracts me to this stock, and, for the record, I am looking for more just like it. With the ratio so high, investors are going to have to really dig to find opportunities. There is cashflow coming from this stock. Investors are going to be looking for that. Plus, the revenue continues to improve, and with that earnings will do the same. Then, there is the economy in general which is expanding, providing more opportunities for this company.
It is natural that a company that deals in a product that was the cause of the Great Recession would be left aside. No one wants to potentially, get into a company they may feel could potentially do a repeat. But, there is so much regulation making it nearly impossible to create another situation similar to the last financial crisis. Plus, no company would dare put themselves in the same place. Simply, there is much greater scrutiny now.
I have been searching around the market to find these passed over opportunities. They exist and they have a lot of potential. You would want to get into these companies quickly because eventually the rest of the world is going to be finding these stocks as well, and they will be purchasing them. That will push up the price, putting you in a position to create significant wealth for your portfolio.
|This article from Macroaxis published on 24 of January contributed to the next trading period price escalation.The overall trading delta to the next next day price was 0.32% . The overall trading delta when the story was published to current price is 2.55% .|