Orchid Island Capital (ORC) is back in focus after reporting a first quarter net loss alongside a lower book value, while simultaneously expanding its agency RMBS portfolio and shifting toward higher yielding, call protected collateral.

Despite the first quarter loss and lower book value, Orchid Island Capital’s recent portfolio expansion and hedging adjustments have coincided with a mixed share price pattern. The 7 day share price return of 3.33%, the 90 day share price return of a 14.3% decline, and the 1 year total shareholder return of 18.81% together suggest that momentum has been choppy rather than moving in a single direction.

If this kind of income focused story has your attention, it can be helpful to widen the lens and see what else is moving by scanning 18 top founder-led companies

With the share price close to the latest analyst target, a fresh quarterly loss, and management pointing to higher modeled returns, the key question is whether Orchid Island Capital is quietly undervalued or if the market is already pricing in better days ahead.

Preferred P/E of 11.7x: Is it justified?

On a simple earnings yardstick, Orchid Island Capital trades on a P/E of 11.7x, which points to a low headline valuation relative to both its own earnings profile and the wider US market.

The P/E ratio compares the current share price to earnings per share and is often used for companies with a consistent profit history, like mortgage REITs that report regular net income. For Orchid Island Capital, this lens matters because the company reports high quality earnings, has recently been profitable with earnings growth over the past 5 years, and currently generates an 83.8% net profit margin.

That 11.7x multiple is below the US market average P/E of 19.5x. This suggests investors are paying less per dollar of Orchid Island Capital’s earnings than for the market overall. At the same time, the stock is described as expensive relative to the US Mortgage REITs industry average of 10x and a peer group average of 10x. In other words, the market is assigning a premium compared to closer competitors even though the broader market assigns a higher multiple to earnings.

According to the fair P/E estimate of 34.4x, there is a large gap between Orchid Island Capital’s current valuation and the level the market could move toward if that fair ratio ever came into focus.

Result: Price-to-Earnings of 11.7x (UNDERVALUED)

However, you still need to weigh the recent quarterly loss and 5 year total return of 36.8% alongside sector specific risks in agency RMBS and interest rate policy.

Next Steps

With both concerns and bright spots on the table, how does this balance of risk and reward stack up for you, and are you comfortable with it given your goals? If you want a clearer view of what the market is worried about and what could work in Orchid Island Capital’s favor, take a few minutes to scan the 3 key rewards and 3 important warning signs.

Looking for more investment ideas?

If Orchid Island Capital is on your radar, do not stop there, the wider market is full of ideas that might fit your income, quality, or risk preferences.

• Target higher potential upside by scanning a curated list of quality companies trading below their estimated worth with the 53 high quality undervalued stocks.
• Strengthen your income stream by reviewing companies that combine yield with resilience using the 14 dividend fortresses.
• Dial down portfolio stress by focusing on companies with healthier finances through the solid balance sheet and fundamentals stocks screener (44 results).

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.