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Javelin Mortgage (NYSE:JMI) has been one of my top picks for 2014. JMI is still a very young company as it went public in October 2012 but has been a solid performer in the last four months. At the time of this writing, the stock is up 32% from where I first got long. The biggest scrutiny I receive for this stock besides being a young company is that its management team is ARMOUR Residential Management LLC, the same name behind the popular Armour Residential REIT (NYSE:ARR). This management team historically has not performed well, but with JMI things have gone a bit more smoothly. Critics repeatedly remind me that have "run companies into the ground and bankrupted shareholders." Besides management, 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. It also invests in commercial mortgage backed securities and other mortgage related investments, including mortgage loans, mortgage related derivatives and mortgage servicing rights. When JMI was trading just over $13.00 I named it as a stock that would rise into 2014. That prediction has come to fruition as the stock blew through $14.00 as the New Year began. I raised my price target on the stock after it spiked a full point in nearly two weeks. The stock nearly hit my initial Q1 2014 target of $15.00 last week when it traded at $14.99 on Friday January 10th. I now have a $15.50 Q1 2014 price target, but I will tell you that there was just an ill-timed downgrade which could put the brakes on the stock, or depending on your viewpoint, provide an opportunity.

Addressing the Downgrade

I'll be honest I am not in the best of spirits at my trading desk this morning. That is because JMI caught a downgrade from Oppenheimer from buy to hold. I really cannot blame Oppenheimer for this move as the stock has had a huge run since I have been recommending it from $11.00, but I don't think the stock's run is over. The stock was trading at a massive 20% discount to book just before Thanksgiving when Bulldog investors pushed for a buyback. JMI in turn has since boosted its buybacks and has purchased a large percentage of the float back. This catalyst drove the stock higher. Before today's sell-off, the stock was trading last week at a slight premium to the last reported book value of $14.69. However, interest rates were somewhat stable in October and November and although December was a bit volatile, it is likely there will stabilization of the book value, if not an increase in book value, for the end of Q4 2013. I see book value coming in just under $15.00. With JMI deep in the red today, down over 2.5% at the time of this writing, I actually see it as an opportunity for a long position initiation. Some who have gotten in around $11 or $12 are taking profits. I cannot blame them for that. But the company still has a lot going for it, and if it wasn't for this downgrade, given the action in mREITs today and the recent moves in the ten year treasury yield, shares would be north of $15.00. I think the market is overreacting as the fundamentals of the company are still in place.

Still No Insider Sales.

Insider sales occasionally concern me, but insider buys excite me. For JMI there have been insiders at JMI who purchased a number of shares since the sell-off in the mREITs began. No one is selling, even after the 35% spike in share price from JMI's 2013 lows. Table 1 has the details of recent insider transactions for your reference.

Table 1. Javelin Mortgage Investment Insider Trades Over The 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

The insiders who have purchased shares see JMI going higher. They also see that the dividend is to be maintained and will keep coming in 2014. We recently got confirmation that JMI's dividend would be maintained in 2014 (and the stock went Ex-dividend today) and its monthly distribution will be $0.15 per share.

You Still Get A Sustainable Dividend Yielding Over 12%

While competitors race to cut dividend, JMI has made only one cut, albeit a large on back in summer 2013 from $0.23 to $0.15 monthly. JMI recently announced its dividend policy for all of 2014 and plans to pay $0.15 monthly for every month in 2014, or $1.80 on an annualized basis. At $14.50 a share, the stock is yielding 12.4% per share. We know JMI will pay $0.45 for Q1 2014, which is a good reason to own shares that have had positive momentum up until today. Depending on how the year goes, JMI may increase or decrease the amount of one or more announced dividends before the applicable record date or may declare supplemental dividends, if necessary to maintain REIT status.

Conclusion

I understand this downgrade from Oppenheimer's point of view saying that "ok you bought, it had a huge run, now let's hold to see what happens." I get it. However, it is ill-timed from my perspective given my price target and the momentum the stock has had. JMI has been up nearly every session for three weeks. I would rather have seen Oppenheimer wait until the price had stabilized, but so be it. The facts haven't changed as to why you should still own and even consider buying JMI after this sell-off opportunity. JMI is maintaining its dividend and will be paying over 12% annually. It plans to pay this for all of 2014. This is a sign of strength in an otherwise weak sector. The company's portfolio is a touch riskier than many competitors, but it is also far more diversified and has had good action in its book value for the last few months of 2013. I suspect book value will have risen when the Q4 2013 report is released. No insiders are selling the stock. The ten year treasury has sunk back below 3%, which is a strong way for mREITs to kick-off 2014. Even with today's selling, technically the stock is having a classic breakout pattern. Combine that with a strong fundamental basis and I see no reason to sell here.

Source: Javelin's Downgrade: Sell The News Or Seize The Opportunity?