The last article I wrote that focused on Annaly Capital Management (NLY) was about the change in direction I thought was coming for the stock. This was early October and the beginning of a short term bearish trend. In this trend I suggested a short term income play. It was a credit spread and here is what I originally suggested:
The Options Play
The stock is presently trading at 16.89. I am looking for a pullback in the stock at this point as it adjusts to the sting of QE3 and in the short run, I do not see another bullish leg starting. For this reason I am looking for a bearish credit spread as a short term income play.
- Sell a January 2013 call with a strike price of 17.5 (priced at $0.17)
- Buy a January 2012 call with a strike of 19 (priced at $0.03)
- Net Credit to Start: $0.14
- Maximum Profit: net credit
- Maximum Risk: $0.84
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Annaly is falling out of favor with analysts.
- Dwindling dividend will not favor continued growth in stock.
- Looks like it has peaked.
The stock is presently trading at 14.79 and the options should expire this coming Friday. So far, the play looks good. If one wished to close out the trade early this is what it would look like:
- Buying back the 17.5 January call will cost $0.01.
- Gross Profit: (net credit to start: $0.14)
- Net Profit: ($0.14 - buy back cost $0.01)= $0.13
- Monthly ROI: 3.25%
- Yearly ROI: 39%
It looks like the stock has built a foundation; can we expect the stock to move up from here?
mREIT's in 2013
mREIT's gained on average 20% in 2012 outperforming the S&P that gained about 16% and they are expected to remain competitive through 2013. What does it have going for it in 2013? Job and economic growth could add to higher occupancy rates which is good for rental growth. Moody's Investor Service also believes the mREIT will do well in 2013 as it has this to say about the industry:
"It will experience stable to positive portfolio performance over the next nine to 12 months, continuing the trend of improved same-property net operating income from the third quarter of 2012."
If I could find a potential challenge, it would be interest rates. They have been very low since 2008 but they could creep up this year depending upon the economic recovery rate and this is not good for the mREIT. Other risks-with the development already underway, an increase in rental growth is needed to balance out growth and occupancy. Some debt maturity faces the industry in the next couple years and this may place some minor risk. There is plenty of cost-effective capital out there.
Annaly in 2013
As 2012 came to an end, the stock dropped in value from October through the end of the year. This is understandable taking into account the company's track record toward year's end. The fourth quarter dividend was cut by 10% but still is a very respectable 12.8% so I do not see an exodus from the stock. I believe income investors will still look to the stock this year. Annaly will continue to have a challenge with margins that have decreased by 1% (year over year) since the third quarter because the Federal Reserve is behind the very low interest rates.
I believe the challenges NLY will face in 2013 will be weathered well. It will still carry a high dividend and will be of great interest to income investors through the year.
The stock looks like it has built a base around 13.62 for 6 weeks as it now tries to move up. If I observe the indicators, the MACD has been moving up in strength since the foundation was being built and the RSI indicator has been steadily moving up since the New Year. The stock has a slight bullish move as it shies away from the upper Bollinger Band. This is a good sign that the stock will continue to move up.