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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 Cherry Hill Mortgage Investment Corporation CHMI 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:
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, Cherry Hill Mortgage has a trailing twelve months PE ratio of 7.2, as you can see in the chart below:
This level actually compares quite favorably with the market at large, as the PE for the S&P 500 stands at about 17.91. However, if we focus on the long-term PE trend, Cherry Hill Mortgage’s current PE level puts it below its midpoint of 8.3 over the past five years.
The stock’s PE also compares favorably with the Finance Market’s trailing twelve months PE ratio, which stands at 14.09. This indicates that the stock is quite undervalued right now, compared to its peers.
However, Cherry Hill Mortgage has a forward PE ratio (price relative to this year’s earnings) of 7.78, which is slightly higher than the current level. So, it is fair to expect an increase in the share price in the near term.
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, Cherry Hill Mortgage’s P/CF ratio of 4.59 is way lower than the Zacks Retail Mortgage Trust Market’s average of 57.69, which indicates that the stock is much undervalued in this respect.
Broad Value Outlook
In aggregate, Cherry Hill Mortgage currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Cherry Hill Mortgage a solid choice for value investors.
What About the Stock Overall?
Though Cherry Hill Mortgage 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 Score of F and a Momentum Score of A. This gives CHMI a Zacks VGM score — or its overarching fundamental grade — of C. (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 upward revision versus no downward revisions over the past sixty days, while the full-year estimates have seen two upward and no downward revisions in the past sixty days.
This has had a positive impact on the consensus estimate as the current quarter consensus estimate has shot up 4% over the past two months, while the full year estimate has surged 3.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Cherry Hill Mortgage Investment Corporation Price and Consensus
Cherry Hill Mortgage Investment Corporation price-consensus-chart | Cherry Hill Mortgage Investment Corporation Quote
Such bullish analyst sentiments is the reason why the stock has a Zacks Rank #2 (Buy) and why we are looking for outperformance from the company in the near term.
Cherry Hill Mortgage is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite a weak industry rank (among Bottom 6% of more than 250 industries), a Zacks Rank #2 instils optimism in the stock.
However, over the past two years, the broader industry has clearly underperformed the market at large, as you can see below:
We believe, despite an unsatisfactory past industry performance and rank, a good Zacks rank and bullish analyst sentiments signal that the stock is likely to benefit from favorable broader factors in the immediate future. Add to this robust value metrics, and we believe that we have a strong value contender in CHIM.
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