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Summary

  • Investors get boost of confidence by CIO purchase.
  • WMC participated in the KBW Mortgage Finance Conference on June 3.
  • 2 methods of gaining an 18% return.

Insider trading is not uncommon, as key leaders of companies are investors also. Investors like to see leadership buying shares, which displays confidence in the value of the company they are running. The estimated purchase total was nearly a $158,770 investment. That is a respectable cash investment, and investors will take notice.

Anup Agarwal, the Chief Investment Officer for Western Asset Mortgage Capital Corp. (WMC), purchased 10,000 shares for $14.43 and 1,000 shares for $14.47, as shown in the SEC's Form 4 effective June 6, 2014.

Past insider trading from May 2014 includes Travis Carr, who purchased 2000 shares, and in April 2014, James Gavin purchased 11,350 shares. In March 2014, Sherman Sherwyn purchased 15,180 shares. This trend has been ongoing and you can see the full list on the webpage here.

On June 3, 2014, WMC participated in the KBW Mortgage Finance Conference. The slides are posted on the website here. Most of the information is from the first quarter financial report, dated March 31, 2014.

Three highlights from the presentation include:

WMC has a 3.3 billion investment portfolio and is focused to optimize the risk-adjusted net economic return delivered to shareholders through strong core earnings through an attractive dividend and stable book value.

WMC is looking at opportunities to gain exposure to newly originated, non-conforming whole loans at attractive yields. Due to a lack of mortgage credit and new lending standards from regulators, these types of loans investment opportunities are available.

Identify and invest in mortgage assets with the greatest risk-adjusted total return potential.

"Risk-adjusted" is the key to the investments, as the company is looking for the highest return, but aims to manage the risk to protect the portfolio and investors.

The company has a leverage ratio of 7.4 x 1, which is a mid-range compared to other MREITs. The portfolio's gross yield is 3.57%, and the hedge-adjusted cost of financing is 1.77%. That leaves the net interest spread at 1.80%. Both of these are positive numbers for the quarterly report.

WMC's second quarter financial statement is expected to be released in August and will show dramatic improvement over second quarter 2013. During May 2013, the Federal Reserve Chief (at the time Ben Bernanke) made the comment in a speech that the Fed was going to begin reducing the purchases of bonds each month. This comment, commonly referred to as 'Tapering' had a drastic affect on many financial institutions and REITs. Many REIT stock prices dropped 30% in value over the following 2-3 months. Since then, the stock prices have not regained their losses, but the stocks have continued paying dividends with an annualized return mostly in the teens.

WMC's 52-week high and low is $19.59 and $13.50. The company's stock price has been on a roller coaster in correlation with the ex-dividend date when the company pays a strong dividend.

An example of the dividend effect is demonstrated during the fourth quarter 2013, when the company paid a $0.916 dividend and included a catch up amount of $1.474 for a total of $2.35. The company announced the dividend on December 19, 2013, as the stock price closed on the December 19 at $15.92. Over the next week, the stock price climbed to a high of $17.48, and then dropped after the ex-dividend date. The stock price bottomed out on January 2, 2014 at $14.64, and began a 2-month climb to a high just prior to the ex-dividend date of $17.05 as a $0.67 dividend was being paid. The stock price once again dropped to a low of $13.50 on May 16, 2014, and has begun its next climb toward the next dividend expected later this month.

WMC has declared its quarterly dividend during the last month of the quarter, then released its financial statement after the quarter closes. The stock price has already climbed from the quarter's low of $13.50 to $14.54, and we expect it to continue its climb to near $16-$17 when the company announces its second quarter dividend.

We recommend an investment in Western Assessment Mortgage Capital Corp. There are two methods investors may choose to receive value from their investment. First, the buy and hold method where you can receive a strong dividend (last quarter, it provided an $18.44% annualized return). If you choose to reinvest your dividends, your investment can grow at a very high rate.

The second method is to buy after the dividend is paid when the stock price drops. This would be the low for the quarter. Hold the stock for about 60 days and ride the price appreciation up to just prior the next ex-dividend date and sell. The last two quarters have seen a $2-$4 rise after the stock price drops after one dividend to the next dividend. If you are comfortable in timing the market, you could reap very profitable returns.

Source: More Insider Trading Purchases By Western Asset Mortgage Capital Corp.