Ellington Financial: Fairly Valued, Shares Nearing A Breakout (NYSE:EFC)

Value investors should like what they see in the Financials sector. According to John Butters at FactSet, the area has a forward operating earnings multiple of just 12.7 – below the 5-year average of 13.1. It is the second-cheapest sector in the S&P 500. Real Estate, meanwhile, has seen some signs of life lately, and its non-GAAP estimated P/E is 17.8 – slightly above the market’s 17.3 figure. Investors can also capture a high yield in real estate.

One extremely high payout mortgage REIT reports earnings next month, and shares could be putting in a bottom. Let’s check out Ellington Financial (NYSE:EFC).

Sector Valuation: Financials Cheap

According to Bank of America Global Research, Ellington Financial is an externally managed hybrid mortgage real estate investment trust (mREIT) that invests in a wide range of asset types including mortgage-related, consumer-related, corporate-related, and other financial assets, through investments primarily in securities and loans.

The Connecticut-based $824 million market cap Mortgage Real Estate Investment Trusts (REITs) industry company within the Financials sector has negative trailing 12-month GAAP earnings and pays a high 13.2% dividend yield, according to The Wall Street Journal.

Shares trade near 0.9 book value per share, about in line with peers, but the firm has a more diversified and flexible capital and funding structure. The credit profile is also robust with somewhat low balance sheet leverage.

On valuation, analysts at BofA see earnings having fallen by more than 6% in 2022, but then recovering by nearly 5% in 2023. Earnings growth slows to a tepid 1.1% pace by 2024, though. The Bloomberg consensus forecast is slightly more optimistic than what BofA projects.

Dividends should hold steady near $1.80 on an annualized basis. As a result, both EFC’s operating and GAAP P/Es should remain in attractive single-digit territory while the yield stays above 11%. Overall, the valuation looks okay, but growth is soft. Let’s assess the chart to help clarify where investors should place their bets.

Ellington Financial: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Wednesday, February 22 after market close. Before that volatility catalyst, shares have an ex-dividend date of Monday, January 30.

Corporate Event Calendar

The Technical Take

EFC is making an attempt to break out from a downtrend that began in the summer of 2021. After putting in a bearish double-top pattern just above $19, the stock plummeted to a low below $11 this past October. A rally to just shy of $15 was met with sellers as EFC could not get above its falling 200-day moving average. Notice in the chart below that shares are nearing the downtrend resistance line but are still materially under the 200dma.

I would like to see the stock get above $15 – in which case a modified reverse head and shoulders reversal pattern would be in play (albeit without a defined neckline). The stock could make a run at the $16.50 to $17 area on a bullish breakout.

EFC: Shares Approach Resistance, Eyeing A Breakout

The Bottom Line

A lot of bad news has been discounted in mortgage REIT shares. Now we must wait to see how earnings play out and how charts encapsulate ebbing news which hopefully turns better in 2023. I am a hold on the stock for now but look to revisit this one in a few months to see how the chart situation has unfolded.