As Peter Lynch once said, there's no shame in losing money on a stock. Everybody does it. What is shameful is to hold onto a stock or worse, to buy more of it when the fundamentals are deteriorating. We've completed our review of Expedia (EXPE) and that's where that stock is now.
We are terminating coverage of Expedia for the time being. Of course we stand behind our initial post-earnings take on the company's long-term prospects. Management will figure out how to game the search engine algorithms and get back to capturing the sweet spots of the Travel industry. This is a temporary inconvenience, not a fatal flaw. We'll undoubtedly be back when conditions improve.
But determining whether to hold onto Expedia or cut it loose revolved around how long it will take for Peter Lynch's deteriorating fundamentals to recover. That's where the calculus weighed against holding onto this stock any longer than it needed to stabilize after earnings. After all, this business generally operates at a loss for the first and fourth quarters anyway, so the first chance management has to show us real earnings momentum is when the 2Q20 numbers roll around nine months from now.
That's a long time to hold onto a position that otherwise is more likely to weaken than rebound while we wait for the year-over-year comparisons to improve. At best, we see Expedia drifting with the market. And while we could stick around for a bounce, there's no guarantee we won't still be stuck here months from now. Even the upcoming dividend is no real reason to keep this stock on our radar . . . two weeks of patience will at best shave 1% off what's currently a 4% loss.
Of course, if you love Expedia, we know how you feel. Hold on if you like and maybe we'll see you again in nine months, or even before that point if the numbers improve faster than we currently expect. But in our view, nine months is a long time to tolerate dead money without other extenuating factors to feed our continued interest and our patience. This is the slow time of year for this company. We can let it hibernate without much fear of missing a sudden upswing.
On the other hand, New Residential Investment (NRZ: $15.24, down 6% this week) has those extenuating circumstances on its side. For one thing, unlike Expedia with its relatively symbolic dividend, New Residential rewards shareholders with $0.50 per share every three months, which is more than enough to keep up with the S&P 500 across a typical year. As long as there's enough cash to pay those dividends, the stock can spin in wide arcs without ruffling our confidence.
It's now clear that last quarter's brief yield curve inversion wasn't able to take earnings below the $0.50 per share the dividend requires. The inversion was the doomsday scenario for any company like this that pays a little interest to borrow in the short term in order to lend the money back out at longer-term rates. When the curve started to recover, it was clear that the environment had gotten as bad as it gets.
Management pointed out three crucial details on the quarterly conference call. First, mortgage rates never drop as fast as Treasury yields, so the revenue-generating side of operations remains more robust than a pure bond-based strategy. Second, low mortgage rates are good for loan origination, which is a business where this company is successfully diversifying. And third, book value actually went up to $16.26 per share. That's not accounting magic. This company is worth more now than it was three months ago.
And it's worth a whole lot more than the $15.68 we initiated new coverage at a few weeks ago. The stock dropped yesterday on a downgrade from Piper Jaffray, dropping their target to $16, and on signs that the curve is relapsing, but we know now how bad it can get when rates completely invert . . . and that's not bad enough to shake the dividend. Moreover, the Fed is still pumping $60 billion a month into the money markets to keep short-term rates down. That wasn't true when the curve inverted, but now it's clear that the central bank will do whatever it takes to keep the worst-case scenario from happening here.
Meanwhile the company's non-interest businesses keep expanding, lightening the overall pressure from an abnormal rate environment. In the current quarter, we suspect New Residential will be able to book at least $0.51 per share in profit and pass shareholders $0.50 of that money. From there, the numbers inch higher. The only thing that would make us exit the stock in that scenario is a full relapse in the yield curve.