Here's Why I'm Staying Fairly Bullish On Shares Of Western Asset Mortgage Capital

| About: Western Asset (WMC)


WMC currently trades at 6.2x forward earnings and offers shareholders a yield of 19.43%.

WMC's CPR continues to remain low due to its focus on buying securities that exhibit low prepayment characteristics.

WMC's recent trend behavior signals long-term buying mode for most investors.

As an income-driven investor who has a knack for double-digit yields, I've decided to shift my focus to the mortgage REIT sector, and highlight a number of reasons behind my decision to remain bullish on shares of Western Asset Mortgage (NYSE:WMC).

Company Overview

Headquartered in Los Angeles, California, Western Asset Mortgage Capital Corporation focuses on investing in, financing, and managing primarily residential mortgage-backed securities. Although its core investment strategy will be focused on Agency RMBS, it may opportunistically supplement our portfolio with RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, or non-Agency RMBS, commercial mortgage-backed securities and other asset-backed securities.

Recent Performance & Trend Behavior

On Wednesday, shares of WMC, which currently possess a market cap of $396.98 billion, a forward P/E ratio of 6.20, and an annual distribution yield of 19.43% ($3.20), settled at a price of $16.47/share.

Based on their closing price of $16.47/share, shares of WMC are trading 1.72% above their 20-day simple moving average, 6.93% above their 50-day simple moving average, and 8.55% above their 200-day simple moving average.

It should be noted that these numbers indicate a slight short-term, as well as a very moderate mid-to-long term uptrend for the stock, which generally translates into a moderate buying mode for most near-term traders and a stronger buying mode for most long-term investors.

Three Comparatives To Consider When Looking To Establish A Position In Shares Of WMC

Even though the above referenced numbers indicate a long-term uptrend for the company's stock, I actually think its unit price of $16.47/share offers investors a considerable point of entry. Why? Well, I think that since shares are trading at a much better forward P/E ratio than a number of its hybrid-based peers, this could be a great buying opportunity for many investors.

As of Wednesday's close, WMC's forward P/E ratio of 6.20 was much lower than the forward P/E ratios of both Two Harbors Investment Corp. (NYSE:TWO) (forward P/E ratio of 9.75 as of 3/12) and American Capital Mortgage Investment Corp. (NASDAQ:MTGE) (forward P/E ratio of 7.59 as of 3/12), which were considerably higher. A stronger forward P/E ratio clearly signals a greater level of affordability for Western Asset Mortgage Capital, especially when compared to both Two Harbors and American Capital Mortgage.

The second thing I should highlight is the fact that not only does Western Asset Mortgage Capital have a much lower forward P/E than both of the above-mentioned hybrid-designed mortgage REITs, it also carries a much higher yield. As of March 12, shares of WMC were currently yielding 19.43%, whereas the shares of both Two Harbors (9.89%, $1.04/share) and American Capital Investment Corp (13.09%, $2.60/share) were considerably lower.

The last of the three things I should note is the fact that not only does WMC outpace its peers in terms of forward P/E and yield, it also finds itself trading at a price-to-book value of 0.97 as of March 12. This particular ratio places WMC right in the middle of both Two Harbors (P/B ratio of 1.00 as of 3/13) and American Capital Investment Corp. (P/B ratio of 0.94 as of 3/13).

A Look At WMC's Most Recent Quarterly Performance

On Friday March 7, Western Asset Mortgage Capital reported core EPS of $0.70/share, which was $0.05/share lower than the street had been expecting. In most cases, a miss by $0.05/share or more would have some investors shying away from even the thought of establishing a position, but in this case, things are a bit different.

During the fourth quarter, the company recorded net income of $0.83/ share while generating core earnings of $0.70/share, and an economic return on book value of 4.8%, which represented the change in its book value plus the dividends that were declared.

Also included in the company's earnings report were the figures pertaining to the constant prepayment rate WMC demonstrated during the fourth quarter. Its constant prepayment rate (or CPR for its agency RMBS portfolio) was 5% on an annualized basis, which was 0.3% lower than the 5.3% that was demonstrated during the third quarter of 2013. It should be noted that the company's CPR continues to remain low due to its focus on buying securities that exhibit low prepayment characteristics.

If WMC can continue to generate a consistently higher economic return on book value by an average of 5.0% over the next 12-24 months, while enhancing its core earnings by an average of $0.02/share in the same period, there's a very good chance WMC's share price could appreciate in both the near and long terms.


For those of you who may be considering a position in Western Asset Mortgage Capital, I strongly recommend keeping a close eye on the firm's distribution behavior, its trend performance, and its ability to continue to enhance shareholder value over the next 12-24 months, as each of these factors could play a role in the company's long-term growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WMC over the next 72 hours. 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.