Redwood Trust, Inc. (RWT)

Grants Investment letter - salvaging mortages

Heavy losses the past few quarters. This company is struggling hard. The market is tough right now, but among its competitors this company is having a hard time bouncing back. Although it will be a while, this company may do well in the future.

Do I even have to explain? Negative to minimal earnings, negative cash flow, long term debt and a P/E of 186. Also, I am shorting all of the stupid bounces today like this one and its 30% simply because the government gave some taxpayer money to citigroup. We shall see how well that works out for this company and others.

Hello free CAPS points

Debt to equity of over 12
balance sheet decreasing!
REIT!
large funds bailing selling tons of shares!
Uh Oh!
also
Oh Dear!

Although it will be rough in the near future, this company has the foundation in place to maintain it's operations and expand when the market begins to calm. I'm anticipating $45-$50 around 4 years out, with steady $3/year dividends.

Likely no special or a greatly reduced special this year, and possibly next.

Debt/Equity = 12

PEG 2.12

Trouble

1. Managers of the company are experts in the mortgage field. They have a long term positive track record. They predicted the current problems more than a year ago and prepared for it by raising cash. Although the problems they predicted are greater than they anticipated, I believe the managers know what they're doing. They manage the company very conservatively and are honest with their accessments which are fully disclosed in a quarterly report called "The Redwood Review". This report is not lite reading and it helps to be well versed in accounting and the mortgage field to fully understand it, but the good and the bad is there for analysis. There are definite risks (like a complete melt down of the economy with many more people walking away from the mortgages), but I think investing at the current price more than justifies the risk. Furthermore, the managers are also heavily invested in the company and the company will buy back shares if the price gets low enough (which is what they did in the late 1990s).

2. A large amount of the losses reflected in the financial statements are due to "mark to market" paper losses. There was and will continue to be pain due to "actual" losses but I don't think it will be enough to justify the current discount in the price. Cash flow will decrease in the short run (6 months to year and a half) due to these actual losses probably requiring a dividend reduction. However, once available cash is fully deployed, there will be a rebound in the cash flow and dividend that will justify a higher stock price. It's important to recognize the company is financed through equity and long term debt and does not have liquidity issues. This makes it possible for the managers to be patient and they will eventually take advantage of the dislocations in the markets they understand so well.

paying a $3 or 14.5% dividend while losing $44 a share and change doesn't work. The dividend will be cut. They are also in one of the worst industries for investment at this point: mortgage investment.

This stock is a great buy right now. The blog that was written last week was from an uneducated, misadvised hedge fund who was writing it in their best interest to lower stock prices.

The credit crises and morgage meltdown in the U.S. isn't going anywhere this summer and is likely to only get worse. If Bear Sterns couldn't survive what hope is their for the rest of the financial sector. Yes, the financial sector seems to be jumping back and key reversals seem to be lifting bullish investors, but this ray of hope will end once investors understand how bad this looming recession is going to be. Even the hopeful and growing few in the financial sector are going to suffer from the troubles of the many.

Overvalued, significant ALT-A exposure, no catalysts for growth.

Where to start...

-has poor fundamentals
-trades over-valued with an abnormally high P/E (especially relative to long-term growth prospects)
-resides in the real estate sector, facing credit problems and overall depreciation of asset values
-poor balance sheet riddled with high debt and low cash flow
-high short ratio

33.48

Highly levereged -- paying dividends through borrowings. Will have to continue issuing stock, sell off long term assets (at a discount), or reduce dividend in order to satisfy dividend obligations -- any way you cut it price should go down.

Another strong REIT that is already in the right places and needs to get out from the Real Estate black cloud.

Well-financed, conservative management. Exposure to lousy mortgages should be minimal, at least relative to the more aggressive hosers in this space. Should at least do 15% growth per year, including dividends, for at least 5 years.

This one will take a few years to turn around, however, I believe it will explode when it does.

I have been watching this stock for the last few years and bought a couple of big blocks at 25 a few weeks ago. The dividend rate used by the rating services consistently misses the December surprise of two dollars a share or more each year. At $25 a share paying $3 in dividends and at least $2 in special distributions since 2003 the rate of return is around 20% on my investment.

Principals are well versed in risk management and do due diligence not just read cookie cutter prepared risk ratings for their products. I expect them to significantly increase their market share of high quality Jumbo loans in the turmoil of the current mortgage fiasco. especially where Merrill, Citi and others didn't do their job to manage risk and now have pulled back with huge losses.

Contrarian pick - this company is a REIT defined in their profile as "Real Estate and Mortgage backed securities" - yikes! And it is based in California, no less! Double-yikes! BUT, it has a ton of cash and looks like it is seeking to take advantage of the current situation, including a huge stock buyback.