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Since I first argued that Annaly Capital (NYSE:NLY) and Chimera (NYSE:CIM) were "too good to be true" in my controversial article here, the stocks have significantly underperformed the broader market. They appreciated by just 0.6% and 5.3%, respectively - far lower than the S&P 500's return of 11.5% over the same time period. And, worse, matters are only getting worse as I describe herein. What follows is a review of the companies.

Annaly

Annaly trades at a respective 33.4x and 7.5x past and forward earnings with a dividend yield of 14%.

Consensus estimates for Annaly's EPS forecast that it will decline by 24.1% to $1.95 in 2012, grow by 7.2% in 2013, and then decline by 6.7% in 2014. Assuming a multiple of 8x and a conservative 2013 EPS of $2.06, the rough intrinsic value of the stock is $16.48, implying 0.9% upside.

What irritates me, the Street, and many investors about the company is how unclear management is. They opt to go for story telling during earnings call, refuse to clarify their investment strategy, and, now have been forced to cut dividends. In fact, the company recently decided to cut its dividend yield 15% from 2Q11. There has been a steady decline in dividend payments since 2Q11 given earnings uncertainty. The shelf registration of 125M shares at an offering price of $16.16 further solidify the downside story.

Chimera

Chimera trades at a respective 5.7x and 6.2x past and forward earnings with a dividend yield of 14.8%.

Consensus estimates for Chimera's EPS forecast that it will decline by 28.8% to $0.47 in FY2011 and then by 4.3% and 2.2% more in the following two years. Assuming a multiple of 8x and a conservative 2013 EPS of $0.43, the rough intrinsic value of the stock is $3.44, implying 15.8% upside. But where earnings go is largely a gamble and, frankly, not worth the risk. If the multiple holds steady at that conservative estimate, the stock will plummet 17.5%.

While the firm is cheaper than Annaly from a multiples perspective, it has significantly higher volatility. The company has also had problems of it own. It had to fire its accounting auditor and hire a new one, kicking down the date for its earnings call. Its dividend has also fallen - a trend that has occurred steadily since 3Q10.

Source: Annaly And Chimera: Big Possible Downside

Additional disclosure: The distributor of this research report is not a licensed investment adviser or broker-dealer. Investors are cautioned to perform their own due diligence.