Can These Stocks Bounce Higher?

However hard the market slams a stock, there's always the chance it'll come bouncing right back. We'll consult our Motley Fool CAPS community to find shares on the rebound, examining one specific sector of the economy in search of companies with rising CAPS ratings.          

There are 188 stocks listed under "real estate" in the CAPS' screener, and more than a handful of them carry well-respected four- and five-star ratings. Those accolades mean our 170,000 CAPS members are confident that these stocks will beat the market in the months ahead, but let's see what members are saying about the ones below:

Source: Motley Fool CAPS; Yahoo! Finance. NA = not available.

The markets have been on a roller-coaster ride lately. With the S&P 500 up 10% over last year, you might be surprised to learn the CAPS real estate stocks have done only slightly worse, rising 8% in that same time span. So let's take a closer look at why investors think some of these other companies won't be jumping from the frying pan into the fire now that the markets are roiled again.

Some spring in its step
Remember the next round of calamity that was supposed to hit the mortgage industry following the subprime mortgage crisis? The new round of rate resets on option ARMs was supposed to hit this year and a weakened real estate market was supposed to go through its death throes all over again. But there's surprisingly little discussion of that happening now.

Part of the reason may be that many of those option ARM holders have already defaulted. Some of the risky loans that allowed borrowers to pay just a portion of the amount due were very popular at the height of the mortgage craze. The balance you didn't pay every month was added to the mortgage total, but only up to a certain percentage. When you hit that magic number, your loan is recast and you have to start making new, much higher payments.

The borrowers who took out such loans did so because they couldn't afford the mortgages they were getting as it was, and the new higher payments would cause them to default. According to some analysts, half of those mortgage holders whose 2006 loans were securitized had already defaulted on their loans by the start of last year.

While analysts had thought the interest rate resets would have a devastating effect, the impact has probably been minimal because the Fed has kept interest rates artificially low, allowing the new rates that borrowers received to actually be lower than what they were paying previously.

Yet those low rates also had the effect of giving mortgage REITs a huge gift. The Fool's Anand Chokkavelu explains how that happens:

Mortgage REITs tend to use a lot of debt to finance their portfolios of mortgage-backed securities. When the Fed keeps interest rates low, the spread between the interest they pay on their debt and the interest they get from their mortgage-backed portfolios tends to be high. In other words, they make a killing when the Fed keeps interest rates low.

We end up with REITs like American Capital Agency and Hatteras Financial (NYSE: HTS) rushing to cash in on the low rates. Investors benefited as well since REITs are required to pay out 90% of their profits as dividends. Anworth Mortgage (NYSE: ANH), Annaly Capital (NYSE: NLY), and Chimera Investment all pay dividends yielding north of 14%.

Yet Cypress Sharpridge Investments (NYSE: CYS) recently said it was going to hold its dividend steady, indicating the upward momentum may be stalling.

And while Gramercy Capital has been getting its financial house in order by selling off some investments, deleveraging its balance sheet, and boosting liquidity, the reorganization caused it to delay filing its annual report, which triggered a delisting notice from the NYSE.

Although REITs have done well for themselves avoiding the minefield, CAPS member davidm8797 thinks the bill will eventually come due and REITs like Chimera will have to pay up:

Mortgage backed securities will evaporate in value soon, I just know it. Unless there is serious government intervention. But my guess is there won't be, at least in the name of MBS's and CDO's

You can stay on top of how these REITs rate by adding them to your watchlist:

• Add American Capital Agency to your watchlist.
• Add Chimera Investment to your watchlist.
• Add Gramercy Capital to your watchlist.

The ball's in your court
There are many factors that go into whether a stock is a buy or sell, so it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Head over to CAPS today and share your thoughts with other investor analysts on whether you think these stocks are ready to bound higher.