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Redwood Trust (RWT): Zacks Rank Buy

Zacks Equity Research

Redwood Trust, Inc. (RWT) announced outstanding second quarter 2012 results, which included an earnings surprise of 31.6% and year-over-year EPS growth of 118.2%. Since the report, earnings estimates have ramped higher, helping this diversified REIT (real estate investment trust) become a Zacks #1 Rank (Strong Buy).

Strong Second Quarter

On August 2, Redwood Trust reported second quarter earnings of 25 cents per share, comfortably ahead of the Zacks Consensus Estimate at 19 cents and the year-earlier earnings of 11 cents. The company also recorded an estimated taxable income of $17 million or 22 cents per share. Net income was $19.5 million, compared with $9.4 million in the year-ago quarter.

Net interest income climbed 4.5% year over year to $30.6 million and operating expense spiked 25.5% to $15.2 million.

Strong Earnings Momentum

The Zacks Consensus Estimate for 2012 rose 6.9% to $1.08 per share in the last 30 days on upward revisions from 3 of 6 estimates. The current estimate implies a year-over-year growth of 31.3%.

For 2013, the Zacks Consensus Estimate is $1.18, marking an upswing of 2.6% in the same time. This suggests year-over-year improvement of about 9.9%.

Attractive Valuation

Redwood Trust's valuation looks compelling compared with the industry by most metrics. Based on the 2012 earnings estimates, the company is trading at a price-to-earnings (P/E) multiple of 13.70, a discount to the industry average of 16.09. The price-to-book ratio of 1.23 is at a 43.1% discount to the industry average of 2.16. Valuation looks attractive with respect to the price-to-sales (P/S) ratio as well. The P/S ratio of the company stood at 5.12, a 23.4% discount to the industry average of 6.68.

The stock also looks appealing with regard to its trailing 12-month ROE of 6.3%, which is above the industry average of 4.4%.

Chart Reflects Strength

Since April 25, 2012, Redwood Trust has fared better than the simple moving average for 200 days as well as for 50 days. Shares have jumped almost 14% since the announcement of the solid second quarter results and this continuous uptrend in stock prices offers an enticing upside potential going forward. Moreover, on September 6, 2012, shares reached a new 52-week high of $14.85.

Volume is fairly strong, averaging roughly 848K daily. The year-to-date return for the stock is 44.9% compared with the S&P 500's return of 13.9%.

Based in Mill Valley, California, Redwood Trust specializes in acquiring and managing real estate mortgage assets. The company was established in 1994 and remains committed to shareholder value enhancement. With a market capitalization of $1.17 billion, Redwood Trust primarily competes with Capstead Mortgage Corp. (CMO) and Annaly Capital Management, Inc. (NLY).

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