Redwood Trust, Inc. (NYSE:RWT)

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

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.

The subprime hysteria is about due to wind down. With a basis of 28.44/sh I'm lookin at a 10.55% dividend with terrific upside potential for capital growth. Check out the annual report and look at what mgt did in anticipation of the 'inevitable' downturn in the mortgage industry due to oversupply. With the div, every year, my basis gets lowered by 3$/sh; how can that be bad? Based on ttm EPS of 3.58 and assuming NO growth, the stock is trading 4$ under what it should be, based on DCF. This has got to be a minimalist estimate.

Quality company being thrown out with the bad. This company will be able to survive and prosper post credit crunch. Dedicated to their dividend which is currently yielding 8.5%. Special dividend is probably going away for now but it will be back and it presents a pleasant Christmas bonus most years.

Ok, here is a classic wall street and everyone else is unhappy with this and sold it off. But at the end of the year a bonus dividend and next year it will be trading in the $50s. So maybe it won't be the best performer but it will be a solid performer.

This company is using the chaos in the subprime markets to strengthen their competitive advantage.

Look for good growth in cash as housing picks back up. Maybe in a few months, maybe in a few years. The gains should be accelerated when they do come.

Now would not be a bad time to begin building a position through RWT's direct stock purchase program.

REIT paying out almost 6%, plus the stock price is still a little low so look to get appreciation in the price as long as it's under 55.