Two Harbors Investment (TWO): A Fresh Analyst Upgrade Sparks a Closer Look at Valuation

J.P. Morgan recently upgraded Two Harbors Investment (TWO) to a buy rating, sparking fresh investor attention. This move comes as analysts continue to reassess the company’s trajectory in light of shifting real estate market dynamics.

See our latest analysis for Two Harbors Investment.

After a tough stretch for much of the year, momentum around Two Harbors Investment has started to show subtle signs of life, with recent analyst upgrades counterbalancing a year-to-date share price return of -18.5%. Over the past year, total shareholder return sits at -13.5%, but looking further back, investors who held for three years saw a positive total return of 6.3%. This suggests that, despite setbacks, there has been real potential for patient holders.

If you’re interested in where momentum and insider conviction might overlap, now is a great moment to broaden your scope and discover fast growing stocks with high insider ownership

With analysts revisiting their outlook and shares still trading below consensus price targets, the question now is whether Two Harbors Investment is undervalued or if the market already anticipates any future rebound. Could this be a buying opportunity, or is growth already priced in?

Price-to-Sales Ratio of 3.9x: Is it justified?

Two Harbors Investment trades at a price-to-sales ratio of 3.9x, slightly above its peer group average of 3.7x. This signals that the stock is relatively expensive compared to similar companies at the last close price of $9.77.

The price-to-sales (P/S) ratio shows how much investors are willing to pay per dollar of sales and is commonly used for companies with inconsistent profitability. For Two Harbors Investment, this is especially relevant given its current lack of profits but ongoing revenue stream.

With a P/S ratio just above its peers, the market is attributing a modest premium. However, when compared to the US Mortgage REITs industry average of 4.3x, Two Harbors Investment actually appears slightly undervalued on a broader sector basis. It is worth noting that the estimated fair P/S ratio for the company is just 0.3x, which is significantly lower than both its current multiple and the sector average. This indicates there could be considerable downside if the market reverts to this level.

Explore the SWS fair ratio for Two Harbors Investment

Result: Price-to-Sales Ratio of 3.9x (ABOUT RIGHT)

However, slowing annual revenue growth and the company’s ongoing net loss remain key risks. These factors could dampen investor confidence if they persist.

Find out about the key risks to this Two Harbors Investment narrative.

Another View: SWS DCF Model Looks for Undervaluation

While the price-to-sales ratio presents Two Harbors Investment as slightly expensive compared to peers, our DCF model provides a different perspective. According to this measure, shares currently trade just below the estimated fair value of $10.05 per share, indicating a modest undervaluation of about 2.8%. This may suggest the market is presenting a subtle opportunity.

Look into how the SWS DCF model arrives at its fair value.

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 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Two Harbors Investment Narrative

If you see things differently or want to dive deeper, you can quickly shape your own view in just a few minutes. Do it your way

A great starting point for your Two Harbors Investment research is our analysis highlighting 2 key rewards and 1 important warning sign that could impact your investment decision.

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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.

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