Redwood Trust (NYSE: RWT) and Capstead Mortgage Corporation (NYSE:CMO) are both small-cap finance companies, but which is the better investment? We will contrast the two businesses based on the strength of their valuation, risk, earnings, dividends, analyst recommendations, institutional ownership and profitability.

Profitability

This table compares Redwood Trust and Capstead Mortgage Corporation’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Redwood Trust 46.04% 12.02% 2.50%
Capstead Mortgage Corporation 35.05% 7.31% 0.56%

Insider & Institutional Ownership

85.7% of Redwood Trust shares are owned by institutional investors. Comparatively, 71.2% of Capstead Mortgage Corporation shares are owned by institutional investors. 2.3% of Redwood Trust shares are owned by company insiders. Comparatively, 1.7% of Capstead Mortgage Corporation shares are owned by company insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a company is poised for long-term growth.

Earnings and Valuation

This table compares Redwood Trust and Capstead Mortgage Corporation’s top-line revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Redwood Trust $215.70 million 6.01 $134.95 million $1.75 9.61
Capstead Mortgage Corporation $88.27 million 10.62 $58.62 million $0.61 15.98

Redwood Trust has higher revenue and earnings than Capstead Mortgage Corporation. Redwood Trust is trading at a lower price-to-earnings ratio than Capstead Mortgage Corporation, indicating that it is currently the more affordable of the two stocks.

Risk & Volatility

Redwood Trust has a beta of 0.89, meaning that its share price is 11% less volatile than the S&P 500. Comparatively, Capstead Mortgage Corporation has a beta of 0.36, meaning that its share price is 64% less volatile than the S&P 500.

Dividends

Redwood Trust pays an annual dividend of $1.12 per share and has a dividend yield of 6.7%. Capstead Mortgage Corporation pays an annual dividend of $0.84 per share and has a dividend yield of 8.6%. Redwood Trust pays out 64.0% of its earnings in the form of a dividend. Capstead Mortgage Corporation pays out 137.7% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Redwood Trust has increased its dividend for 3 consecutive years.

Analyst Ratings

This is a summary of current ratings and recommmendations for Redwood Trust and Capstead Mortgage Corporation, as reported by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Redwood Trust 0 0 0 0 N/A
Capstead Mortgage Corporation 0 2 0 0 2.00

Capstead Mortgage Corporation has a consensus price target of $11.00, indicating a potential upside of 12.82%. Given Capstead Mortgage Corporation’s higher possible upside, analysts plainly believe Capstead Mortgage Corporation is more favorable than Redwood Trust.

Summary

Redwood Trust beats Capstead Mortgage Corporation on 11 of the 15 factors compared between the two stocks.

About Redwood Trust

Redwood Trust, Inc., through its subsidiaries, focuses on investing in mortgage and other real estate related assets. The Company is engaged in mortgage banking activities. The Company operates through three segments: Residential Investments, Residential Mortgage Banking and Commercial. The Residential Investments segment includes a portfolio of investments in residential mortgage-backed securities (RMBS) retained from its Sequoia securitizations. The Residential Mortgage Banking segment consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to its investment portfolio. Its Commercial segment consists of investments in multi-family securities and commercial mortgage-backed securities, as well as a remaining commercial loan investment following the sale of the remainder of its commercial mezzanine loan portfolio.

About Capstead Mortgage Corporation

Capstead Mortgage Corporation operates as a self-managed real estate investment trust (REIT). The Company manages a leveraged portfolio of residential mortgage pass-through securities consisting of relatively short-duration adjustable-rate mortgage (ARM) securities issued and guaranteed by government-sponsored enterprises, either Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), or by an agency of the federal government, the Government National Mortgage Association (Ginnie Mae). The Company finances its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting primarily of borrowings under repurchase arrangements with commercial banks and other financial institutions. The Company’s portfolio of residential mortgage investments includes residential mortgage investments.

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