Is it worth sticking with Annaly Capital Management (NYSE:NLY)? Truthfully there are safer yields out there, even within the mREIT sector. Javelin Mortgage (NYSE:JMI) is a great place to look if you are considering dumping NLY and looking for a better position in the sector. Other hybrid mREITs have performed admirably as well. I recently discussed why I think NLY has bottomed and that article sparked an intense, entertaining and educational debate regarding the company and the its stock (thank you). Rather than repeat much of what I have discussed in the past about reasons why the stock has sold off and what I think the future holds, please peruse my numerous articles on the sector. In this brief article (as opposed to my usual 2,000 plus word tomes) I really want to highlight one key piece of data that no one is really talking about. What piece of data is that? The insider buying at the company. We can debate interest rates, Fed actions, mortgage applications etc., but this key topic deserves to be discussed.
Insider Buying Is a Huge Plus
No one is discussing the insider buying at the company. Perhaps it has been recognized and viewed as inconsequential. I think that is wrong. I believe it simply isn't getting the air time it deserves. Here are the plain facts that you absolutely need to know. In the last five years, there has not been a lot of insider activity, generally speaking. In fact, there have been 18 buys in that time frame. What is interesting to note, and you MUST be aware of even after this huge selloff, is that management has faith in the stock. How do I know this? Because there were nine insider buys in 2013 (table 1). That represents 50% of the insider buys in the last five years.
As if that point were not enough to bring attention to the stock and the insider holdings, there is one more piece of data that I think helps support my thesis that the worst is over for NLY. What is really compelling is that of these nine buys in 2013, 89% were in the second half of 2013, during a time when NLY was under extreme pressure. Furthermore, a block of these buys came when NLY was approaching its psychological support level of $10.00 back in November 2013. Simply put, management viewed the price of the stock as intriguing enough to put their own money on the table. This is a huge vote of confidence in the company and these buys are reassuring as a shareholder. I know what some of you are going to say. Some of you are thinking that these people are multi-millionaires and their purchases are not a huge stake of their wealth. However, while management is well compensated, I highly doubt they would simply throw their money away into shares if they thought the stock was going to further plummet. That said, do you invest a significant portion of your worth into one single stock? Would you invest into something that you knew, or highly believed would keep dropping?
Table 1. Annaly Capital's Insider Buys in 2013.
Share Price ($)
Rose Marie Lyght
NLY's CEO Wellington Denahan's purchases of 181,818 shares for two million dollars and 93,000 shares for nearly one million dollars are incredibly hard to dismiss. She picked up shares for $10.96 and $10.68. This is just a few percentage points above the current share price of $10.29. Factor in the payment of the dividend of $0.30 and it's nearly even money. How about Kevin Keyes' purchase for 100,000 shares? He's in the green on that with the dividend. Then there is Rose Marie Lyght, who actually is sitting on a 2% unrealized capital gain (not counting the dividend). Isn't it peculiar that these large buys were made as the stock approached its recent bottom?
The plain fact is that I think this buying activity deserves more attention, because to me it is very telling. Management may pretend to take a hands off approach, but I think they are smarter than that. They know where their business stands. People sell stock for all sorts of reasons but buy them for only one. What do the purchases mean for us? I think it adds evidence to support my thesis that NLY hit a bottom a few weeks ago. While anything can happen down the road the fundamentals are favorable right now. Interest rates, after spiking in December, have plummeted in January. As such, existing MBS values are likely higher. Leverage has been reduced capping NLY's upside but this also limits downside. That's important to remember. Finally, there has been positive price momentum in the short-term. Coupled with the intense insider buying in Q4 2013, I think its safe to say most of the bleeding is complete. I see no reason to run for the hills now.
There is no doubt that if you purchased in the last two years you are in the red unless that purchase was in the last few weeks, much like the insiders at NLY. If you have the will to weather the storm you will do well. The power of the dividends, even with the extreme volatility over the long-term, should deliver great returns. Keep it in perspective and remember that mREITs have their place in a diversified tax favored portfolio. For those looking for positive news, the insider activity is extremely telling. Look at the activity in table 1. Nearly half a million shares were purchased by insiders in 2013 and not one was sold. Trust in the management as they have skin in the game just like most of you.
Disclosure: I am long JMI, NLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.