Armour Residential REIT: An Attractive Long-Term Play

| About: ARMOUR Residential (ARR)

It isn't often that overall bad market news (even if it is packaged nicely) may spell good news from analysts, but REITs haven't been following the rules since they became popular. ARMOUR Residential REIT (ARR), with its focus on hybrid adjustable, adjustable and fixed rate residential mortgage-backed securities (RMBS) guaranteed by US government agencies or sponsored entities, has been a strong player for its external management company, ARMOUR Residential Management LLC, since 2009.

ARMOUR has been reporting strong dividends and great growth potential along with other mortgage REITs for a while now, even in the worst parts of this current recession. These showings haven't always been earth-shattering, but positive performance in a bad economy, even if just relative to other stocks, is always noteworthy.

Unless you've been hiding under a rock, you have likely heard the March jobless reports from Gallup were not very good. In fact, many experts are reporting they were downright bad, as on the surface the unemployment rate (and its related numbers) went down a little, but did not meet expectations.

There is always the sticky matter of those who give up looking for full-time work and work instead for themselves at a lower level. I have had to care for a parent with Alzheimer's and cannot maintain an outside full-time job where I am required to be in the office (which was required as a business analyst), so I have worked since December in a freelance capacity. As I do not receive nor am eligible for unemployment and am not receiving the full-time work I need to support myself fully, I fall into the unreported crack where my underemployment does not count. At least, I don't recall anyone from Gallup calling me recently to ask if I'm getting enough work.

Sustainability of these modest decreases in joblessness is also being questioned - it is just not possible yet to say unemployment is getting better, but perhaps easier to say it's not getting worse. Some of the improvements could merely be corrections by employers who, in a panic, initially let go of more people than they needed to and are only now hiring back to that level.

I purport, however, that even setbacks in the market may make REITs relatively more successful - they have generally enjoyed strong performances in the past four years. Just recently ARMOUR is showing a negative or "undefined" price to earnings ratio, meaning it is not currently showing earnings. Taken by itself, that would not typically be considered in any way to be good news. But back in December 2011 ARMOUR had an earnings multiple of around 10, above the then-average of 6-7 for REITS. The presidential election year antics have thrown another wrench in trying to predict recovery, and it is possible this slide is temporary in an area where performance can go in the opposite direction by the next month.

There are indeed other REITs that find themselves in a position to benefit even in with this mixed bag of unemployment news. American Capital Agency (AGNC) is a mortgage REIT that invests in securities guaranteed or sponsored by the government. It has been showing an average price to earnings ratio for a REIT. Chimera Investment (CIM) invests in RMBSs, both those guaranteed by government agencies and those that are not. It posts a similar earnings ratio to that of American Capital. Although none of this stands out as fantastic, the same theory of REITs performing relatively well in a recession applies to these holdings.

Hatteras Financial (HTS) invests in residential mortgage-backed securities, including pass-through securities, backed by Freddie Mac and Fannie Mae. Its price to earnings ratio is a bit stronger than that of Chimera and American Capital. Finally, Equity Residential (EQR), in the S&P 500, focuses its investments in the residential properties themselves instead of the mortgages - over 400 high-quality apartment properties around the United States. Equity Residential is also on the S&P 500. Its earnings multiple is crazy high, in the hundreds. This could indicate it's too pricey to buy now, but that it also carries high reward for those who risk. For those who have the funds to invest, Hatteras and Equity Residential could be a way to go.

If and hopefully when jobless rates decline, and concurrently can be proven to be doing so without some inversely poor indicator elsewhere, stocks in general have every reason to experience a surge that hopefully will signal the beginner of a long climb upward. But comparing to where we were before the Great Recession started, we still have a way to go before I am convinced this part is for real. Many REITs have never even experienced the "good old days" and have made some money for their investors. Bets usually involve two sides, with someone benefiting from each possible outcome. For now, it just may be the REITs that win the battle - I do not know yet about the war.

I don't see the Gallup March 2012 jobless rate poll as a reason for putting the kibosh on buying ARMOUR, or many other mortgage REITs for that matter. "Buying on bad news" or when a nervous market clouds valuations is a core strategy of successful investing, and in fact, the market depends upon it. This doesn't mean there won't be stock market losers, but I'm not putting ARMOUR on this list right now. And as a long-run improvement in the market seems inevitable in the coming year or two, this long-term investor is fine if everyone doesn't agree with me.

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