Newcastle Investment (NCT) is a commercial mortgage REIT with an asymmetrical risk/reward for equity investors. The near term down side is limited because the management has improved the balance sheet and eliminated short-term recourse debt. The upside is a multiple of the current share price because the company is leveraged to a continued recovery in commercial real estate mortgage security (CMBS) prices.

Historically, NCT purchased mostly CMBS and securitized them into CDOs. When the capital markets closed in 2007-08, Newcastle was caught with some short-term recourse debt obligations at the same time its assets were declining in value. This caused financial distress, and the stock declined to as low as 15 cents in November 2008.In the last two years, management has done a solid job of cleaning up the balance sheet and taking advantage of opportunities in the capital markets to resolve the company’s financial distress.