Recent share performance and business profile

Without a specific headline event driving trading activity today, Two Harbors Investment (TWO) has still drawn attention after a recent share price move, prompting investors to reassess its risk and income profile.

The stock shows a 1 day return of around a 1% decline, with a 7 day move of about a 3% decline and a one month performance near an 11% decline, while the past 3 months sit modestly positive.

Over longer periods, total returns are mixed, with year to date at about a 3% decline and the 1 year total return around a 16% decline, while 3 year and 5 year total returns show 4% and 33% declines respectively.

Two Harbors Investment (TWO) focuses on mortgage servicing rights, agency residential mortgage backed securities and related financial assets, operating as a REIT incorporated in 2009 and headquartered in Saint Louis Park, Minnesota.

At a share price of US$10.21, the recent 1 month share price return of about an 11% decline and 1 year total shareholder return of roughly a 16% decline suggest fading momentum after a brief 3 month share price recovery.

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With Two Harbors Investment trading at US$10.21 and some valuation indicators pointing to a discount, the key question is whether investors are seeing an overlooked income REIT here or a market that is already pricing in its future prospects.

Preferred Price-to-Sales of 2.9x: Is it justified?

Two Harbors Investment is trading at a P/S ratio of 2.9x, and based on Simply Wall St's fair P/S estimate of 0.3x, that looks expensive relative to its own fundamentals even though the current share price of $10.21 is 22.2% below the SWS DCF fair value estimate of $13.12.

The P/S ratio compares the company’s market value to its revenue. It can be a useful shorthand for how much investors are paying for each dollar of sales, especially for businesses that are currently loss making. In this case, Two Harbors Investment’s P/S of 2.9x sits below the US Mortgage REITs industry average of 4.9x and also below the peer group average of 3.2x, so the market is assigning a discount to the stock relative to similar REITs on this metric.

However, the SWS fair P/S ratio for the company is 0.3x, which is far lower than the current 2.9x level. This implies the market price is well above the regression based level the ratio could move toward if it converged with underlying drivers. That tension between a discounted P/S versus peers and an expensive P/S versus the fair ratio is worth keeping in mind alongside the DCF indication that the shares are trading at a 22.2% discount to an estimated future cash flow value of $13.12.

Result: Price-to-Sales of 2.9x (OVERVALUED)

However, you also need to weigh risks such as an annual revenue decline of 153% and a net loss of US$508.4 million, which could challenge any recovery story.

Another angle from the SWS DCF model

While the current 2.9x P/S ratio looks expensive against a fair ratio of 0.3x, the SWS DCF model points the other way and suggests Two Harbors Investment is trading about 22.2% below an estimated fair value of $13.12. So which signal carries more weight for you, the cash flow view or the sales multiple?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Two Harbors Investment for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 45 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Does this mix of discounted signals and heavy risks leave you curious rather than convinced? Act while the data is fresh, and weigh it up for yourself with 2 key rewards and 1 important warning sign.

Looking for more investment ideas?

If Two Harbors has sharpened your focus, do not stop here. Broaden your watchlist with a few targeted stock ideas that fit different investing styles.

• Target resilience first by checking companies that pass tough balance sheet checks with our solid balance sheet and fundamentals stocks screener (41 results) and see which names keep their finances in stronger shape.
• Hunt for potential value by scanning companies our models flag as priced below their fundamentals using the 45 high quality undervalued stocks, so you do not overlook candidates others might skip.
• Prioritise income by reviewing reliable payers highlighted in the 13 dividend fortresses, especially if you want yields backed by more than just a headline rate.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.