American Capital Agency (AGNC) operates as a real estate investment trust (REIT). It invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities or by the United States government agency. The company funds its investments primarily through short-term borrowings structured as repurchase agreements. It has elected to be taxed as a REIT under the Internal Revenue Code of 1986. (Taken from Yahoo Finance)
Zvi Bar, the number one rated REIT author on Seeking Alpha currently, recently wrote an article on American Capital Agency. He wrote at the end of his article:
…the mREIT still offers one of the highest yields among all mREITs, and possibly the highest yield within publicly traded agency-only mREITs. Nonetheless AGNC holds significant leveraged interest rate risk, which could become an issue if and/or when interest rates ever begin to substantially rise.
For a stock that has been moving up like it has and the fact that it could be greatly affected by rising interest rates, it would be smart of me to be in touch with where analysts believe interest rates are going in 2012.
Mortgage interest rates are still to be affected the European debt scenario. If it escalates more, rates may drop to 3.50%, one analyst wrote. Overall though, 2012 should look familiar, floating in the low 4% range without much impediment. The consensus view (i.e. median forecast) is that short-term interest rates should remain stable in 2012, while longer-term rates are forecast to rise modestly. With this in mind, it does not look like there will be much impediment in the stock's continued steady climb.
Wunderlich and JMP Securities both ungraded American Capital to buy status within the last 45 days. The stock now has a price target of 34 or 12% above its present price.
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The stock has dropped as of late, but we believe long term it will continue to move up. For this reason, we would make a short-term options play as well as own the stock through the rest of the year. For an options play, we would use a bullish debit spread.
The Options Play
We would look at a bull call spread here.
- Buy the September '30' call option (priced at $0.70)
- Sell the September '31' call option (priced at $0.27)
- Net Debit to Start: $0.43
- Maximum Profit: $0.57
Reasoning behind the Trade
- Analysts have a new target price on the stock at 34, well within our trading range.
- Low and steady interest rates through 2012 bode well the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
