3 Red Flag Stocks Heading for a Catastrophic Plunge

Stocks to sell

Spotting read flags early can play a crucial role in protecting your portfolio. Today, I’m going to look into three stocks to sell. The stocks include two mortgage REITs and a data center REIT. Some investors may focus too heavily on a stock’s dividend yield. I urge investors to take a look at troubling signs that may just send these stocks into a catastrophic plunge.

Understanding the fundamentals combined with recent performance are two factors that go into investigating a stock. The mortgage REITs have a history of cutting dividends and though it isn’t the only factor to look at, it is important. Data centers have been getting some extra noise because of AI. However, it’s important to look at occupancy and current/future growth projections.

I would like investors to understand the importance of thorough analysis and caution against simply chasing after yields. Join me as I dive into why some investments may be more trouble than they are worth.

Invesco Mortgage Capital (IVR)

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Invesco Mortgage Capital (NYSE:IVR) is a mortgage REIT known for its extremely high dividend yield. Unfortunately for shareholders, it should also be known for cutting its payout. The company’s dividend was as high as $5.00 per share before the pandemic but now it is only 40 cents per share. The dividend reduction also reflects a reverse split after the company lost most of its value during the pandemic.

Some investors may be betting on IVR to recover to its former glory. Such bets are ill-advised since most of the assets are gone.

Mortgage REIT analysis should focus primarily on book value. However, it is good to also consider the level of earnings and the dividend.

In IVR’s Q1 2024 earnings release, IVR had a slight outperformance on book value. IVR reported $10.08 per share up from the previous quarter of $10.00 per share. However, the company had a more than slight underperformance on its core earnings, or earnings available for distribution.

Due to IVR’s history of dividend cuts, I believe IVR should trade at a significant discount to book value. At a recent price of $9.28, I don’t find shares of this dividend cutter compelling.

Orchid Island Capital (ORC)

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Orchid Island Capital (NYSE:ORC) is another mortgage REIT that cut its dividend. It reduced the payout by 25% in October 2023 from 16 cents per share to 12 cents per share. ORC stated in it’s latest Q1 press release that the dividend didn’t change.

However, during Orchid Island’s earnings conference call, management said it will reassess the dividend throughout the year. Considering ORC pays a monthly dividend, it suggests it is not a question of if ORC will cut the dividend again only when.

Book value for Q1 came in at $9.12 per share, a small increase from the previous quarter’s $9.10 per share. Investors interested in mortgage REITs should understand the price-to-book ratio, which is calculated by dividing the current stock price by the current book value per share. This ratio is currently too high for ORC. Investors buying ORC today would be taking on too much risk with very little reward potential.

Digital Realty Trust (DLR)

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Digital Realty Trust (NYSE:DLR) is a data center REIT with over 300 data centers. DLR also has currency exposure across the globe with exposure to the U.S. dollar only being at 51%. Much of the remaining 49% comes from the euro, which accounts for 26% of DLR’s currency exposure.

One reason data centers have been attractive to investors is because of artificial intelligence. AI requires a lot of capacity which DLR can provide. So why do I believe DLR is headed toward a plunge?

First, investors need to understand the fundamentals. For Q1, DLR’s occupancy was 82.1% down from 83.5% in the previous year’s Q1. Some may think “available for lease” is a good thing when looking at the presentation. It is not; it means these spaces aren’t currently generating income.

Second, core FFO growth per share isn’t looking great. Core FFO is an important earnings metric for equity REITs like DLR.  FFO growth has been relatively flat since 2018. While other metrics may appear good on paper, DLR is only guiding for an increase of 1.1% FFO growth for the current year. Because of this low growth rate, DLR is likely extremely overpriced.

On the date of publication, Michael VanLoon did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, not subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Michael VanLoon is the founder of www.thereitforum.com, where he provides a free newsletter on REITs, BDCs, preferred shares, and a few baby bonds

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