Chimera: Still A Compelling 'Buy' Despite Downgrade

| About: Chimera Investment (CIM)

As a stock and REIT owner, and one of 300 million Americans who recall 2008 as a really bad year, I started paying more attention to detailed financial news, especially when it was featured in many more venues than The Wall Street Journal and other financial standbys. My ears perk up when I hear a bank's name on the news, or my eyes notice if stock news appears on the main page of non-financial newspapers. I was reading about Chimera (CIM), and the first news that popped up was CIM)+to+Hold;+Valuation+Call/7301571.html" rel="nofollow">Deutsche Bank's downgrading of the REIT from "buy" to "hold." Chimera Investment is one of the few REITs I'm following that went down Wednesday, and I became curious as to how the other REITs are being analyzed, and if they would get the same attention if the analyst wasn't a financial giant and prominent financial analyst like Deutsche Bank AG (DB). Deutsche Bank, of course, recently reclaimed its position as Europe's largest bank, and Germany is seen by many as the financial backbone of the EU.

Chimera Investment shares have been trading up and down for months and its current price is much closer to its past year's low rather than high price. Apparently Deutsche Bank is waiting for Chimera Investment to reach a specific level before considering an upgrade back to "buy." How have other REITs fared in recent analyses? Plum Creek Timber (PCL) was PCL)+to+Sell;+Still+Waiting+on+Domestic+Demand+Recovery/7121995.html" rel="nofollow">downgraded from "neutral" to "sell" back on 1/31/12 by US Bancorp; ISI Group downgraded Brookfield Properties Corp (BPO) on 3/19/12 from "buy" to "hold" after Stifel Nicolaus made the same downgrade on 11/8/11; Gladstone Commercial (GOOD) just Thursday (3/29/12) was downgraded from "outperform" to "neutral" by Robert W. Baird; and MI Developments (MIM) showed an upgraded status by "TheStreet" analysts to "buy" on 3/19/12. When searching for number of results for upgrade or downgrade for each of these stocks, there were far fewer results and commentary on MI Developments. I guess bad news always makes the paper; good news does when there is space leftover to fill.

Is it a reason to panic if my chosen REIT has been downgraded by a more "famous" analyst? If the related articles expressed more specific analyses themselves perhaps, but the more likely answer is that the more famous name will get picked up by more online news services, thus replicating the same small initial paragraph of analysis on multiple sites. With the residential housing market having been in such a long slump, it's not unexpected that the apparent rebound would be slow and cautious, rather than quick and life-altering. After all, isn't the rapid growth what got us into this mess in the first place? Also, the downgrade was from "buy" to "hold" instead of "hold" to "sell" or worse yet the larger jump from "buy" to "sell." Hold just means it will ride pretty even with the rest of the current market, and in these economic times that isn't all that bad.

Price-to-earnings ratios are often useful measures, but seldom in and of themselves; this is especially true in the case of REITs. It is generally believed that a high price-to-earnings ratio translates to investors expecting higher earnings growth going forward compared with those companies with a lower price-to-earnings ratio - these comparisons are more meaningful when the stocks in question are in the same industry. Also, the "earnings" part of the ratio is an accounting measure that may not be straightforward (e.g., could be manipulated). For REITs in particular, earnings may be badly distorted by tax consequences of depreciation. Finally, using historical figures (e.g., price-to-earnings ratio over the past year) to calculate the earnings per share may yield very different results as opposed to determining earnings per share from the estimates of earnings expected in the following four quarters (i.e., projected or forward price-to-earnings ratio). Some firms even use a combination of the two methods by basing the earnings per share from the last two actual quarters and estimates of the next two quarters.

Am I going to discount the price-to-earnings ratio in this case? Not yet. Although I have only begun following Chimera Investment and other REITs with a more attentive eye, I need to establish a baseline. The price-to-earnings ratio for the REITs I am discussing were the following at the closing bell on 3/30/12: 1) Chimera Investment - 5.65; 2) Plum Creek Timber - 34.90;3) Brookfield Properties - 5.89; 4) Gladstone Commercial - 116.10; and 5) MI Developments - 10.20. Based on these price-to-earnings ratios alone, I would expect Gladstone Commercial to be the REIT that has the best immediate prospect of growth. But the only REIT here that has been upgraded recently was MI Developments, with one of the lower price-to-earnings ratios of the group considered here.

Having worked and written for commercial and residential mechanical contractors and many engineers and architects, I believe these REITs will increasingly become more important to many investors as part of a balanced portfolio. I'm not going to let Deutsche Bank scare me; Chimera Investment hasn't lost my interest yet. I will continue to keep an eye on the earnings multiple for Chimera Investment and see what the first-quarter report brings. Personally, I'm not letting Deutsche Bank's downgrade affect me negatively. I will hold onto Chimera, and likely buy, albeit cautiously, in preparation for what I feel will be an eventual growth in all aspects of residential housing, and therefore, in REITs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.