On December 7, 2012, Jim Cramer in his TV program said he prefers American Capital Agency (NASDAQ:AGNC) over Annaly Capital Management (NYSE:NLY). The former hedge fund manager was bullish on American Capital Agency, he remained bearish on the largest mortgage REIT, Annaly Capital Management. While his bullish stance on American Capital supports my buy rating on the stock, I disagree with his bearish stance on Annaly Capital.
Annaly Capital Management
The stock of Annaly Capital offers an elevated dividend yield of 13.8%, while chances of capital appreciation are bright. In my detailed article on Annaly December 4, 2012, I calculated a price target of $14.65 for Annaly. The stock is currently trading in proximity of my target price, while the consensus mean target price is $15.4. The stock still has the potential to appreciate in value. It is currently trading at a 13% discount to its third quarter book value.
The company is also in process of acquiring CreXus Investment (NYSE:CXS) in an attempt to diversify its MBS portfolio under the given challenging macroeconomic environment. CreXus invests largely in commercial MBS. I believe this diversification is the right step in the wake of prevailing QE3 and the resultant flattening of the yield curve. Therefore, the diversification strategy will support the company's net interest margin.
Given attractive valuations, elevated dividend yield and the recent diversification attempt by Annaly Capital I disagree with Jim Cramer. I recommend investors to buy Annaly Capital Management and benefit, both from its elevated dividend yield and potential for capital appreciation.
American Capital Agency
American Capital Agency offers an unmatched dividend yield of 16% that I believe is sustainable. It also offers a potential of capital appreciation. I arrived at a target price of $33.7 for the stock, while the consensus mean target is $34.6. The stock is currently exchanging hands at $31.1. It trades at a 4% discount to its book value.
The company has positioned its MBS holdings towards agency securities that have favorable prepayment attributes. Around 71% of the company's fixed rate securities are composed of lower balance mortgages or with loans originated under HARP. This has enabled American Capital to post one of the lowest conditional prepayment rates (CPR) of 9% at the end of the third quarter. This is an improvement from the second quarter's 10%. Comparatively, Annaly has a 20% CPR at the end of the most recent quarter.