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Orchid Island Capital Up 414%, No, Down 20% – Which Is It?

Tim Worstall
Tim Worstall trader
Updated 31 Aug 2022

Trade Orchid Island Capital Stock Your Capital Is At Risk

Key points:

  • Orchid Island stock can be described as 414% up this morning
  • We can also say it's about 20% down
  • Or even up 3% so, which is the right number then?

Orchid Island Capital (NYSE: ORC) stock is listed by some tickers as being up 414% premarket this morning. By others are being up 3%. An accurate reading could have it down by perhaps 20%. So there's a certain confusion as to what the ORC stock price change really is. The confusion not being helped by the difference between nominal changes and real price changes. This not really being helped by the fact that the technique Orchid Island has used is purely one of fashion and there's no grander underlying reason for it than that.

As to what Orchid Island Capital actually does it's a method of gaining access to a managed portfolio of Agency RMBS. Not that that that will mean a great deal to some. To unpack further, residential mortgage backed securities. The bonds that are the outflow from those pools of mortgages common in the American market. Agency means insured through Fannie and Freddie and so on. The advantage of working through Orchid, rather than simply buying exposure directly, is that ORC adds both management and also leverage. This may or may not be a compelling feature for different types of investor.

It's also possible to worry as the prices of MBS have been falling as interest rates rise. And could well decline again if the Federal Reserve decides to unload its book, rather than the current practice of simply allowing it to run off. Orchid Island can be said to be in a fragile state that is. All of which has near nothing to do with today's ORC stock price moves.

Orchid Island stock price
Orchid Island stock price from IG

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And now to explain the price differences. Orchid has undertaken a reverse stock split at a rate of 5 to 1. For every 5 shares that existed at market close last night there is now only 1. This should not change the valuation of ORC as a company, nor the value of any specific holding – it's a purely nominal change here. The reason to undertake such is simply fashion. New York thinks that a solid and dependable stock should be in the $10 to $100 range. Anything below $1 gets kicked off the main markets, NYSE and NASDAQ.

Orchid's share price at close last night was some $2.70. So, – unless they know something we don't about the near future – there was no worry about losing the quotation. But, you know, fashion, so why not?

But a 5 for 1 should mean that the Orchid stock price goes up by 500%. That's $13.50. The main ticker, from NYSE, has it at $13.90, which means that it's up some 3%. Which means that the reverse stock split has changed the total ORC valuation, but only at the margin. At least one ticker has the price up 414%. That would equate to a 20% or so loss. But that is wrong as we can see by looking at the actual stock price itself. Probably the programmer thought that 5 for 1 should lead to a 400% rise.

The lesson for us here is a boring but true one. We can't always trust what the ticker tells us. Trust but verify that is.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.