Arbor Realty: Still Too Cheap Even As We Enter The Eye Of The Storm

In June, I urged Arbor Realty Trust, Inc. (NYSE:ABR) investors to capitalize on the recovery of ABR's uptrend bias, given the significant triple-bottom price action in April 2023. Such a potent market structure augurs well for bullish instincts, marking out selling exhaustion (peak pessimism) and a potentially sharp turning point in investor psychology.

As such, the uptrend has continued remarkably, as ABR significantly outperformed the S&P 500 (SPX) (SPY), notwithstanding the recent pullback from its end-July highs. Ring a bell? Arbor Realty posted its second-quarter or FQ2 earnings release on July 28. Incidentally, that week also marked ABR's July top, falling nearly 17% (price-performance basis) through its mid-August lows. As such, investors who waited until the leading multifamily mREIT posted a robust release before buying in have fared relatively poorly.

It's a reminder for investors to learn the art and science of market anticipation, buying well before peak optimism or selling well before peak pessimism, improving their risk/reward profile significantly.

With ABR's mid-August lows seemingly well-supported, I assessed it's timely for me to update ABR holders on whether it's an opportune to buy more at the current levels.

Bears could argue that management could have spooked the sharp selloff in its earnings commentary. Keen investors should recall that the company highlighted we could be entering "the eye of the storm" over the next few quarters. As such, the mREIT is likely anticipating headwinds on its earnings profile, urging investors to brace for impact.

Management didn't mince its words. The company provided an update on underperforming loans and the CECL reserve adjustments assigned to "one of the NPLs." In addition, management reminded investors that there could be "another two to three [challenging] quarters left," reminding investors that the "bottom of the cycle is typically the most difficult period."

Despite that, Arbor Realty provided helpful commentary that the Fed is likely at the peak of its rate hike regime, enunciating that the company's "outlook on interest rates is more favorable than it was 6 to 9 months ago." As such, it has provided a clearer view for the company and borrowers to "manage their assets more effectively."

Therefore, I gleaned that astute profit-taking in late July as ABR re-tested a critical resistance zone shouldn't be surprising, as these investors likely took risks off the table. Despite that, strong buying support at its August lows suggests that dip-buyers weren't too concerned despite management's cautious update.

Investors should never forget that the market is forward-looking as ABR bottomed out in April 2023. Why? Even though management highlighted that we are still struggling at the "bottom of the cycle," ABR has climbed well out of the malaise. As such, if you waited for the coast to be clear for the good news to emerge, you have missed out on highly favorable risk/reward opportunities to buy more.

ABR isn't aggressively valued. With a well-covered dividend (75% payout ratio from distributable earnings), I didn't assess imminent risks of a cut that could spur more intense selling as income investors rotate out. As such, ABR's forward dividend yield of 10.8% (above its 10Y average of 9.4%) suggests investors have priced in headwinds on its valuation.

ABR found robust selling resistance at its July 2023 highs ($17.7 level) even as it reported a solid Q2 earnings scorecard. That resistance zone has been defended since ABR first fell into a downtrend bias.

As such, it's reasonable to expect dip buyers capitalizing on such levels to take profits/cut exposure to lock in gains. Despite that, robust buying support from ABR's August lows ($14.7 level) has helped it sustain its upward recovery, corroborating the strength of its nascent uptrend bias.

Therefore, I assessed that buyers considering adding ABR should do well below the $17.7 level, taking advantage of the recent steep pullback. However, the buy zone is no longer optimal as ABR has recovered over the past month. Consider averaging down on subsequent pullbacks closer to the $14.7 level, if necessary.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Want To Hear From You

Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

A Unique Price Action-based Growth Investing Service

• We believe price action is a leading indicator. 
• We called the TSLA top in late 2021.
• We then picked TSLA's bottom in December 2022.
• We updated members that the NASDAQ had long-term bearish price action signals in November 2021.
• We told members that the S&P 500 likely bottomed in October 2022.
• Members navigated the turning points of the market confidently in our service.
• Members tuned out the noise in the financial media and focused on what really matters: Price Action.

Sign up now for a Risk-Free 14-Day free trial!