Armour Residential REIT: Wait For A Pullback

| About: ARMOUR Residential (ARR)

By Nick Blair

There was a time when buying real estate meant you had to have a deed or a mortgage agreement in your hand, but not anymore. With the popularization of REIT stocks, we have seen a vast growth in real estate purchases since its inception. While the REIT did and continues to take a major hit, along with the rest of the housing market, the stocks can still be profitable, assuming you know how to pick them. In my opinion, in its rise, ARMOUR Residential REIT (ARR) is a textbook REIT, and is following the same patterns as its more established counterparts.

Being an REIT, the primary factor to consider is yield percentage, because every investor is looking for a high yield on REIT investments. Currently, ARMOUR is at an 17.80% interest rate. This comparatively low yield percentage rate seems to be just a point on the chart of yield percentages. An analysis comparison of the competing REITs is helpful to really put into perspective how ARMOUR adds up.

CYS investments (CYS) has had a pretty steady rate since its peak in October 2010, and it does not seem to have reached its full potential. Another competitor to ARMOUR, Capstead Mortgage (CMO) seems to have fallen by the wayside, since its dramatic 100% plus yield rate high, down to a 13.11% low. Do not be fooled with this relatively low number though, Capstead has become pretty steady since its fall, and could yield a standard every ex-date.

Both MFA Financial (MFA) and Chimera Investment (CIM) are starting to steady out at a 12.94% and 15.55% yield, respectively. Both could be considered solid investments now, but I suggest MFA, as it is more established and therefore has more historical data.

Many analysis of ARMOUR gives the same result: due to increasing interest rates and a high leverage, ARMOUR is doomed for a decrease in both stock points and yields. The simple fact is that with a majority of the REITs, there is a double-digit yield that simply cannot be upheld for a long period of time.

Not to be bearish, but ARMOUR is simply in for a major correction soon. It seems to have already taken a hit when in September of 2011, it was at its highest peak of 21.18%, and it has since been experiencing a steady decline down to its current rate of 17.71% and falling.

Now is this a time to bail on ARMOUR? Not quite. While I do not suggest purchasing ARMOUR over other REITs, it seems that this yield decrease is rather consistent across ARMOUR's main competitors. So, in this time of "recovery", why is every aspect of the real estate market, REITs included, still taking a hit?

With headlines showing pessimism for the housing market, it's no wonder that residential REITs, such as ARMOUR, are taking a hit. But the question is, will the market ever recover? Well, yes, real estate market will one day lose the pessimism and resulting debilitation that it is so closely associated with. This may seem like an overly optimistic outlook that many cannot comprehend because they themselves have had to sell their homes, or worse, been foreclosed on. While it is awful that the bubble burst and many had to suffer because of it, this crash is in no way permanent, but for now, it is still gasping for air.

The simple fact that you, as an investor, needs to know is that there will be a recovery. It could take many years, and the REITs will show gains due to the headlines touting strong recovery. On the flip side, the same newspaper could be saying the next week how the market is slowing and become very pessimistic about the same subject that they were previously talking about with optimism.

Obviously, the best way to come out on top with REITs is to put yourself in the shoes of the majority. Consider that most Americans take the news at its word, so when "the real estate market is gaining!" hits their computer or television, then they may just go buy some real estate based stocks such as ARMOUR or other REITs. So, that would be the time to look out for an increase in yields, but also an increase in price. While there are of course other numbers to consider with REITs such as P/ AFFO, the stock will not help you unless you own it and there becomes a high demand for it.

Because of the seemingly bipolar activity of the news that we trust, it is best to look at the numbers yourself. Since the real estate market will always be judged by the media per new homes sold, familiarize yourself with the current number for new homes sold to be the most up to date. As you and I can see, the market is as low as it could possibly be without there being a depression. While this may seem like a negative number, use it to your advantage.

Specifically, I see ARMOUR dropping due to the pessimistic headlines, coupled with the inability to maintain such a high yield of, so buying now would not be a good idea. While this is the case with most REITs at the moment, consider waiting for what seems like a major lull, such as an exceptionally low yield for a REIT that is below double digits. Then, when the market spikes, as it did in mid-2010, you may find that your investment pays off.

Now, when will this spike occur? No one can be sure. The most effective way to make sure that you come out on top is to buy the REITs low, and hang onto them. Collect your yields on ARMOUR and any other REITs you may have, but avoid purchasing them for now.

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

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