As of now, Annaly Capital (NLY) just might be ready to open a small position. I say that for several reasons, which I will get to in a moment. I am sticking with Annaly because I believe that the company has a few more positives going for it than American Capital (AGNC), and the risk/reward profile is much more appealing to me.
Annaly now has CreXus, which gives the company flexibility to profit from two sectors in the mREIT space; residential and now commercial. The company has taken a more conservative leveraging approach which obviously did not help earnings along the way, but has now put it in a position to smooth out more of the bumps as interest rates settle in. Finally, in a rising interest rate environment, I feel that the history of Annaly lends itself to better navigate the road ahead.
While American Capital has done well by using a higher leverage rate, the aggressiveness now works at its disadvantage as they work to de-lever more quickly. Personally, I feel that American could face 2 or 3 more quarters of significant dividend cuts before it bottoms.
Clarity And Stability Are Going To Help
As I mentioned in my previous article, when the Federal Reserve finally began to taper, the uncertainty of if and when was finally removed. While interest rates spiked, the stock moved in accordance with both of these issues. Many times there are more reasons than pure fundamentals to show how a stock moves.
In the case of Annaly, the stock dipped when the Fed announced, and when the rates rose, but leveled then leveled off. This past week, the stock rose as rates were more stable, but dipped when the 10 year Treasury went over 3%.
As you can see, the share price moved up when the rates became more stable but when the rate went over 3%, the stock dropped on Friday (it went ex-dividend actually and did not drop). The first "marker" is how the rate will react going forward. If the rates hangs around the 3% range and moves up slowly to MY anticipated level of 3.5% for 2014, then NLY can settle in and the share price should become less volatile and along with more clarity and stability, the discount to book value of 23% becomes more in focus.
As this just released Seeking Alpha Market Current announces, I am not alone in my thinking.
Trading at a steep 20% discount to book value, Annaly Capital ((NLY)) is the victim of year-end tax-loss selling and the fear of the effect of higher rates on book value, says Tsachy Mishal. But the year is nearly over, and Annaly management has lowered leverage, hedged its book, and diversified into CMBS - it's well-positioned against further rate increases.
While year end tax selling is not the only reason the stock has taken a beating, the latest leg down could very well be related to that.
From a technical standpoint, Annaly has hit bottom 4 times in one month as this chart shows:
To me there appears to be support at the lower prices and resistance at the higher levels. That being said, since the company has already announced a 15% dividend cut for next quarter, I can live with a dividend opportunity stock being in a "trading range" between $9.70-$10.20 per share.
With a current yield of 12%, and I believe no further dividend cuts, a basically flat-lined share price is fine for me. Ironically, I can NOW see the discount book working in shareholders favor to move the stock to higher lows, and somewhat higher highs. That is NOT to say the share price will see $17.00 anytime soon, but in this case, price stability is a huge step in the right direction.
The Bottom Line
I classify this as a risk stock with a dividend opportunity, and while I am comfortable placing a limit order at $9.65/share for 1/4 of a full position (3-4% allocation), I am still watching the interest rate movements, as well as how the Fed handles the next tapering move.
This is not market timing as it is circumstance timing, and the circumstances are shifting in favor of holding shares of Annaly in my opinion.
Disclaimer: The opinion of the author is not a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.