Seeking Alpha
Research analyst, REITs, biotech, small-cap
Profile| Send Message|
( followers)  

It's been a tough year for the mortgage real estate investment trusts (mREITS). Most are down 20%-40%. A lot of this had to do with the sharp rise in interest rates during the summer. Since then, earnings have suffered, the portfolios have been pressured, the interest rate spreads narrowed and book values have fallen because of interest rate volatility. The rapid ups and downs of rates in 2013 have impacted mREITs portfolios. The truth is that mREITs cannot handle rapid rises in rates. That said, if long-term rates increase gradually while short-term rates stay stagnant, this can widen the interest rate spreads. One rising star has really caught my eye in the last 6 months. The stock is Javelin Mortgage (NYSE:JMI). While many of its main competitors are down another 15% to 25% in the last three months alone, JMI is actually up 18%. That said, I think the next stop is $15.00 a share in Q1 2014.

Lets Review The Basics

As this is a focus article, I think it is prudent to review for the benefit of new readers exactly who JMI is and that the company does. First, I will be honest and straightforward. JMI is a very young company that went public just over a year ago on October 3rd, 2012. The team that runs JMI is ARMOUR Residential Management LLC (ARRM), pursuant to a management agreement, the same name behind the popular Armour Residential REIT (NYSE:ARR). When shares began trading, about 6.5 million shares exchanged hands on day one, and the stock closed trading at $19.60 per share. It should be noted that another offering to raise cash was conducted in the second quarter 2013, an offering of 6,000,000 shares, bringing the total float to 13,500,000 shares outstanding.

JMI is a bit riskier but also more diversified than other companies in the mREIT space, given its hybrid nature and the fact that it doesn't just invest in the safer agency backed securities. Instead, JMI is engaged in investing primarily in hybrid adjustable rate, adjustable rate and fixed rate mortgage backed securities and mortgage loans. Some of these securities are issued or guaranteed by a U.S. Government-sponsored entity or guaranteed by the Government National Mortgage Administration, and other holdings are backed by residential and/or commercial mortgages. At the discretion of management, JMI may also invest in collateralized commercial mortgage backed securities and other mortgage related investments, including mortgage loans, mortgage related derivatives and mortgage servicing rights.

Simple Stock Statistics

At the time of this writing, JMI is trading at $13.85. The stock first caught my attention when the stock dipped under $11.00 in the summer. At its current price of $11.91, shares are now down 29% from where shares closed on their first day of trading last October. Shares aren't heavily traded, as average volume is about 300,000 shares a day. Some of the metrics that really catch my eye with JMI are the things I look for in finding a successful mREIT. First is book value. JMI's last reported book value was $14.69 as of October 30, 2013. On this date, the stock was trading around $12.00, which was a 19% discount to book value. While interest rates were somewhat stable in October and November, December has been a bit volatile. It is likely there will stabilization of the book value or a very slight move within 2% up or down. I certainly cannot see it declining over another $1.00 (or 7%) to where shares trade now. I think that shares are absolutely trading at a discount, and in fact for an mREIT performing this well, should trade on par with book value a 2% increase in book value gets me to my $15.00 target.

JMI has one of the best p/e multiples out there, only trading at three times earnings. For comparison purposes, AGNC trades at about 6 times earnings whereas competitor Annaly Capital (NYSE:NLY) trades at 3. times earnings, so JMI is certainly competitive in this regard, albeit trading a touch at a premium. What about the dividend and yield? JMI pays a sustainable 12.9% annualized yield based on its monthly dividend of $0.15 cents. What I like about JMI, much like ARR, is that it pays its dividend monthly, so investors can compound their investments at a greater pace versus a quarterly distribution. I also like that JMI forward declares its dividends over the next three months.

Insiders Have Been Buying, None Have Been Selling

People buy stock for one reason, and one reason only. They see value and want to make money. That being said, there have been insiders at JMI who purchased a number of shares since the selloff in the mREITs began. No one is selling. Table 1 has the details of recent insider transactions.

Table 1. Javelin Mortgage Investment Insider Trades In Last Seven Months

Insider

Number of Shares Purchased

Price Paid

Date Purchased

Jeffrey Zimmer

5,000

$11.9119

11/26/2013

Ulm Scott

5,000

$11.9163

11/26/2013

Daniel C Staton

5,000

$15.00

6/3/2013

Daniel C Staton

1,200

$15.0758

5/29/2013

James R Mountain

4,000

$15.29

5/29/2013

Ulm Scott

1,000

$14.9348

5/29/2013

John C Chrystal

1,000

$14.81

5/29/2013

John C Chrystal

500

$18.828

5/14/2013

Clearly, insiders believe the company will do well going forward. Prior to this wave of buying, there had been no insider trades since just after the stock IPO'd. Insider buying is usually a sign of strength, particularly when there is a wave of purchases close together when there had been none prior. Couple this with the fact that there has been no selling, and we have a real bullish setup.

A Sustainable Dividend While Many Competitors Are Cutting

JMI is simply outperforming most of the companies in the mREIT sector. The stock is flirting with the $14.00 mark and is on its way to $15.00. Why do I believe the stock is breaking out? Because JMI can afford its dividend and has not cut, like some many mREIT competitors have (think NLY). In fact, JMI recently announced its dividend policy for all of 2014 (Table 2). JMI has stated that it will pay $0.15 monthly for every month in 2014, or $1.80 on an annualized basis. At $13.85 a share, the stock is yielding 12.9% per share, a yield we were accustomed to with NLY. I should also point out that as a REIT, in order to maintain this favorable tax status, JMI is required to timely distribute 90% of its ordinary REIT taxable income. Accordingly, JMI may increase the amount of one or more announced dividends before the applicable record date or may declare supplemental dividends, if necessary to meet this tax requirement. This is indeed possible. In fairness, should the market sour, cuts are also possible. However, I see not cuts for the first half of 2013, unless things go horribly wrong (like the ten year yield spike to over 4.0%).

Table 2. Javelin Mortgage's Announced Dividend Schedule, 2014.

Month

Quarter

Dividend

Shareholder of Record Date

Payment Date

January

First

$0.15

January 15, 2014

January 30, 2014

February

First

$0.15

February 14, 2014

February 27, 2014

March

First

$0.15

March 17, 2104

March 28, 2104

April

Second

$0.15

April 15, 2014

April 29, 2014

May

Second

$0.15

May 15, 2014

May 29, 2014

June

Second

$0.15

June 16, 2014

June 27, 2014

July

Third

$0.15

July 15, 2014

July 30, 2014

August

Third

$0.15

August 15, 2014

August 29, 2014

September

Third

$0.15

September 15, 2014

September 29, 2014

October

Fourth

$0.15

October 15, 2014

October 30, 2014

November

Fourth

$0.15

November 17, 2014

November 26, 2014

December

Fourth

$0.15

December 15, 2014

December 30, 2014

Conclusion

JMI is a young mREIT with a management team that is experienced, but had issues in the past. I think they have learned from there errors. While competitors such as NLY continue to bleed out, JMI keeps plugging along. It is up 18% in the last three months, while NLY, down by about that much. JMI is maintaining its dividend. Wall Street LOVES this fact and so do I. It is a sign of strength in an otherwise weak sector. The company's portfolio is a touch riskier than many competitors, but its also far more diversified. Further, there have been no insider trades in the last year, and only insider buys, with large purchases just a few weeks ago. The stock is breaking out technically with a strong fundamental basis. Shares still trade at a discount to last reported book value. I argue this mREIT should trade on par with book value. That said, a stagnant to 2% rise in book value for the 4th quarter will push the stock to my next target, $15.00 in Q1 2014. All aboard!!

Source: The One mREIT That Will Easily Rise In 2014