Ellington Financial (NYSE:EFC) & Redwood Trust (NYSE:RWT) Critical Survey

Ellington Financial (NYSE:EFC) and Redwood Trust (NYSE:RWT) are both small-cap finance companies, but which is the superior stock? We will compare the two companies based on the strength of their analyst recommendations, profitability, earnings, valuation, dividends, institutional ownership and risk.

Volatility & Risk

Ellington Financial has a beta of 0.95, meaning that its stock price is 5% less volatile than the S&P 500. Comparatively, Redwood Trust has a beta of 1.59, meaning that its stock price is 59% more volatile than the S&P 500.

Insider & Institutional Ownership

55.6% of Ellington Financial shares are held by institutional investors. Comparatively, 74.3% of Redwood Trust shares are held by institutional investors. 4.1% of Ellington Financial shares are held by company insiders. Comparatively, 2.5% of Redwood Trust shares are held by company insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock will outperform the market over the long term.

Analyst Recommendations

This is a summary of current ratings and recommmendations for Ellington Financial and Redwood Trust, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ellington Financial	0	3	5	0	2.63
Redwood Trust	1	2	4	0	2.43

Ellington Financial presently has a consensus price target of $14.46, suggesting a potential upside of 4.66%. Redwood Trust has a consensus price target of $6.75, suggesting a potential upside of 20.86%. Given Redwood Trust’s higher possible upside, analysts plainly believe Redwood Trust is more favorable than Ellington Financial.

Profitability

This table compares Ellington Financial and Redwood Trust’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Ellington Financial	89.04%	14.55%	1.15%
Redwood Trust	-8.62%	9.19%	0.47%

Dividends

Ellington Financial pays an annual dividend of $1.56 per share and has a dividend yield of 11.3%. Redwood Trust pays an annual dividend of $0.72 per share and has a dividend yield of 12.9%. Ellington Financial pays out 116.4% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Redwood Trust pays out -88.9% of its earnings in the form of a dividend. Redwood Trust has increased its dividend for 1 consecutive years. Redwood Trust is clearly the better dividend stock, given its higher yield and longer track record of dividend growth.

Earnings & Valuation

This table compares Ellington Financial and Redwood Trust”s gross revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Ellington Financial	$136.41 million	11.27	$145.86 million	$1.34	10.31
Redwood Trust	$945.16 million	0.75	$54.00 million	($0.81)	-6.90

Ellington Financial has higher earnings, but lower revenue than Redwood Trust. Redwood Trust is trading at a lower price-to-earnings ratio than Ellington Financial, indicating that it is currently the more affordable of the two stocks.

Summary

Ellington Financial beats Redwood Trust on 10 of the 17 factors compared between the two stocks.

About Ellington Financial

Ellington Financial Inc., through its subsidiary, Ellington Financial Operating Partnership LLC, acquires and manages mortgage-related, consumer-related, corporate-related, and other financial assets in the United States. The company acquires and manages residential mortgage-backed securities (RMBS) backed by prime jumbo, Alt-A, manufactured housing, and subprime mortgage; RMBS for which the principal and interest payments are guaranteed by the U.S. government agency or the U.S. government-sponsored entity; residential mortgage loans; commercial mortgage-backed securities; and commercial mortgage loans and other commercial real estate debt. It also provides collateralized loan obligations; mortgage-related and non-mortgage-related derivatives; corporate debt and equity securities; corporate loans; and other strategic investments; and consumer loans and asset-backed securities backed by consumer and commercial assets. The company qualifies as a real estate investment trust (REIT) for federal income tax purposes. As a REIT, it intends to distribute at least 90% of its taxable income as dividends to shareholders. Ellington Financial LLC was incorporated in 2007 and is headquartered in Old Greenwich, Connecticut.

About Redwood Trust

Redwood Trust, Inc., together with its subsidiaries, operates as a specialty finance company in the United States. The company operates through three segments: Residential Consumer Mortgage Banking, Residential Investor Mortgage Banking, and Investment Portfolio. The Residential Consumer Mortgage Banking segment operates a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to its investment portfolio. This segment also offers derivative financial instruments to manage risks associated with residential loans. The Residential Investor Mortgage Banking segment operates a platform that originates business purpose loans to investors in single-family and multifamily residential properties and bridge loans for subsequent securitization, sale, or transfer into its investment portfolio. The Investment Portfolio segment invests in securities retained from residential consumer and investor securitization activities, and business purpose lending bridge loans, as well as residential mortgage-backed securities issued by third parties, Freddie Mac K-Series multifamily loan securitizations and reperforming loan securitizations, servicer advance investments, home equity investments, and other housing-related investments. The company is elected to be taxed as a real estate investment trust (REIT) for federal income tax purposes. Redwood Trust, Inc. was incorporated in 1994 and is headquartered in Mill Valley, California.