CYS Investments (CYS), like most REITs and stocks in general, has a reason for optimism this week. The recently passed and aptly-named STOCK (Stop Trading on Congressional Knowledge) Act signals good news for REITs like CYS Investments, for reasons both obvious and obtuse. Although it seems like a rather obvious already existing law should have already covered this situation, this law's primary purpose is to prevent members of Congress, the President and other Federal workers with access to information from participating in insider trading. The obtuse look at how this law may affect the market is more related to our attitude toward the market, and toward anything the federal government is involved in, including agencies such as Freddie Mac and Fannie Mae.
CYS Investments, only founded in 2006 a couple years before the market's long vacation from prosperity and its IPO only happening in 2009, focuses on the residential mortgage-backed securities market. With its specialization on pass-through securities, the stock relies on how well interest income, the cost of borrowing, and hedging activities are managed. These are a lot of concurrent activities, and an overall positive economy offers the best chance for long-term success.
American Capital Agency (AGNC) is another one of those mortgage REITs that focuses on the RMBS market, including pass-through securities, and influenced by how Fannie Mae and Freddie Mac are perceived in the housing market. Formed in 2008, is has only known a market in recession, still managing to perform very well, including outperforming CYS Investments but mirroring its rises and falls.
Chimera (CIM) chooses agency and non-agency backed securities as an RMBS REIT, and is not fully dependent upon the market's confidence in Fannie Mae and Freddie Mac. ARMOUR Residential REIT (ARR) invests only in hybrid adjustable rate, adjustable rate and fixed rate RMBS issued by or guaranteed by U.S. Government agencies or sponsored entities. Mortgage REIT Invesco Mortgage Capital (IVR) handles government and non-government-backed securities, similar to Chimera.
Of course, part of the benefit of the public's reaction to the passing of the STOCK Act is that there could be more faith in the government-run agencies of Freddie Mac and Fannie Mae - surely the public couldn't have less faith at this point. A mea culpa from the government and relatively more transparency in the trading actions of its paid-by-our-taxes members is a step in the right direction. Responsibility to follow up also falls with the public, as the "fool me once, shame on you; fool me twice, shame on me" rule means that we need to pay attention, keep our elected officials accountable, continue to demand transparency, and stop rewarding those at the top who may benefit from our financial demise. All these REITs with government-backed RMBS interests, like CYS, American Capital, ARMOUR Residential - and to a lesser extent Chimera and Invesco Mortgage - can be part of the transition back to having faith in the protection the federal government can offer.
I contend that, although this adjustment may take a while as the residential housing market promises to be moving very slowly in an upward direction, the influence of any perceived approval by the public to the passing of the STOCK Act will be positive. As soon as one of the Congressional members is caught in the next insider trading scandal - let's face it, it will eventually happen - there will at least be a perceived recourse as well as an "aha" moment that someone was caught because of the law. Our eyes have been opened for the time being, and we just want to get back to the work of making, buying, selling, servicing, loaning, borrowing, hedging and performing.
A "fair playing ground" is the public reason for the STOCK Act, and after you subtract the cynicism present, deep down most in the market believe we can all benefit from a strong market with the confidence of the participants. Does such a law guarantee no one in the federal government will be able to participate in insider trading? Do our other related laws guarantee that no one will be able to get away with insider trading? Of course not. The news here is that maybe a REIT like CYS, publicly traded for less than three years in the depths of a major recession, can be part of the market with an optimism and renewed excitement for investment in the American stock exchanges.
CYS Investments, currently with a relatively low price to earnings ratio but a very competitive performance relative to other REITs such as American Capital Agency, represents the potential that many relative newcomers may experience going forward. Having most of its performance in a negative investing environment, the potential of CYS is possibly greater than anything it has experienced yet. It is not so much that current stock ratios will determine how much this new law will affect each REIT out there. Rather, it is more that the positive feelings engendered by this type of law will hopefully affect future price to earnings ratios, cash flows and other growth indicators for many stocks. The effect could be possibly even greater for those REITs with government-backed agencies and entities.
It is always easy to find bad news, especially from or about our government and our economy, but we have rallied back to around the 13,000 mark, and it's time to allow ourselves to feel better, gather our courage, and stop putting off our investment life while waiting for the other shoe to drop. As American investors are finally ready to start saying yes again to the market, I say, "CYS? Oh, yes!"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.