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Should Value Investors Consider Ellington Residential (EARN) Stock?

Zacks

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Ellington Residential Mortgage REIT EARN stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Ellington Residential has a trailing twelve months PE ratio of 7.44, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 20.14. If we focus on the stock’s long-term PE trend, the current level puts Ellington Residential’ current PE ratio slightly above its midpoint (which is 5.69) over the past three years.


Further, the stock’s PE also compares favorably with the industry’s trailing twelve months PE ratio, which stands at 10.62. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Ellington Residential has a forward PE ratio (price relative to this year’s earnings) of 7.85, so it is fair to expect an increase in the company’s share price in the near future.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, Ellington Residential’s P/CF ratio of 4.62 is noticeably lower than the industry average of 5.41, which indicates that the stock is somewhat undervalued in this respect.

Broad Value Outlook

In aggregate, Ellington Residential currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes EARN a solid choice for value investors.

What About the Stock Overall?

Though Ellington Residential might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘B’. This gives EARN a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen one estimate go higher in the past sixty days, compared to none lower, while the full year estimate has seen a similar trend in the same time period.

This has had a positive impact on the consensus estimate, as the current quarter consensus estimate has risen about 4.7% in the past two months, while the full year estimate has increased about 1.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

This favorable trend is why the stock has just a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.

Bottom Line

Ellington Residential is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Its strong Zacks Rank also indicates robust growth potential in the near future. However, the company’s prospects might be constrained due to adverse broader factors, as it has a sluggish industry rank (Bottom 34% out of more than 250 industries). In fact, over the past one year, the sector has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for the broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.

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