What happened

Invesco Mortgage Capital (IVR -1.12%) had a difficult month in July as its share price fell 11.8% in that span, according to S&P Global Market Intelligence

It trailed the major U.S. stock market benchmark, the S&P 500, which was up 2.3% last month, as well as the S&P 600 Small Cap Index, which was down 2.4% in July.

Invesco Mortgage Capital's stock price is down about 5% year to date as of Aug. 5, trading at just over $3 per share.

A businesswoman at her desk, holding a tablet, punching numbers into a calculator.

Image source: Getty Images.

So what

Invesco Mortgage Capital is a mortgage real estate investment trust (REIT), which means it invests in mortgages, mortgage-backed securities, and other similar assets, and makes money through interest income. The company mostly focuses on federal government-guaranteed mortgage-backed securities. 

The stock price dropped about 5% on Thursday after a less-than-stellar second-quarter earnings report came out. Analysts had expected Invesco Mortgage to post an earnings increase, but the the Aug. 4 release showed a net loss of $88 million, or $0.34 per share, down from a net loss of $20 million in the second quarter of 2020. Also, the book value dropped 12% to $3.21 year over year.

"Agency RMBS sharply underperformed during the second quarter, as continued strong demand from the Federal Reserve was more than offset by elevated net supply, reduced demand from commercial banks, increased prepayment concerns and an anticipation that the Federal Reserve's timeline for reducing purchases could be accelerated," CEO John Anzalone explained.

Now what

Invesco Mortgage Capital got hammered in 2020 due to the effects of the pandemic, particularly on its commercial mortgage-backed securities portfolio, as that market tanked. As a result, its stock price plummeted 73%. 

The company has since sold off its commercial MBS portfolio and is focusing on government MBS investments, which make up about 99% of the portfolio.

While this transition to agency mortgages did not help last quarter, a particularly difficult one for the asset, it should set up Invesco Mortgage Capital as a more conservative stock over the long term -- less prone to the wild swings it saw last year, with more stable returns.