5 REITs To Profit From In A Highly Volatile Market

 |  Includes: AGNC, ARR, CYS, HTS, IVR, RMBS
by: Ry Frank

I knew this was not going to be a great day for the market, and alas the overall drop at the closing bell was about 1%, with the NYSE going below the 13,000 mark. American Capital Agency (AGNC) had actually gone up the last couple days, and although is showing a slight downward bent, does not appear to be in the same sad decline as the overall market. This is when it gets easy to hit the panic button, fearing a return to recession-like behavior. It is days like these when I wish less people hung on all the reporting that goes on. This is not the time to change direction, especially when it's the entire market being affected, not just an industry or other specific group. American Capital, with its focus on Freddie Mac and the Mae sisters, represents an example of a REIT to not give up on.

Multiple occurrences of information in one time period can be too much. In our 24/7/365 news era, the same type of thing can happen with market news. REITs like American Capital, for example, often have monthly dividends, or at least monthly news, as their income often comes in the form of monthly interest payments. Then like other stocks come the quarterly reports; of course they will hit around the same time as four of the twelve months. American Capital has much of its own news on its site, basically reporting all the required notifications as well as their own additional information - always a good idea to pay attention to a holding's news. Naturally an annual report is issued by all holdings, and this report will fall also at the end of a quarter, and the end of a month. Aside from the stocks themselves, there are regular financial reports and statistics, like the monthly jobless report, or quarterly economic indicators. American Capital has a modicum of control over its own reporting; it must follow all reporting requirements, but can choose to report additional news on its site as long as it follows any regulations. Showing the firm is aware of its own reporting and offering any guidance into the direction it is going in to either handle possible negatives or continue in a positive direction could be reassuring to stockholders.

American Capital Agency, with a market cap close to $7 billion, is quite close to its highest price for the past year and far from its lowest, with a decent price to earnings ratio of 6. ARMOUR Residential REIT (ARR), offering various types of adjustable and fixed-rate RMBSs backed by the government, has a much smaller market cap just under $1 billion, a price per share between its high and low for the past year, and a non-applicable (read: negative) earnings multiple. On the surface it does not appear to have the potential of American Capital at this moment in time.

CYS Investments (CYS) more closely mirrors the RMBSs American Capital has to offer, also with a per share price closer to its high than its low, but with a $1.5 billion market cap, and a low earnings ratio around 3.6. Invesco Mortgage Capital (IVR) is another mortgage REIT but it handles both government-backed ((NASDAQ:RMBS)) and other residential mortgages. Its share price is closer to its year-long low rather than the high, is larger than CYS Investments at a market cap of nearly $2 billion, with a price to earnings ratio closer to that of American Capital, at 5.2. In part like the other REITs mentioned here, Hatteras Financial (HTS) invests in RMBSs, including pass-through securities, backed by the US government agencies. A share price also very close to its year-long high and a market cap a bit above $2 billion, Hatteras Financial boasts the best price to earnings ratio of this group: 7.1.

To add to these regularly scheduled new items, there are the unscheduled reports based on other actions in the world. There could be an announcement from a country in the Asian market that is in grave economic distress, which could affect the Asian market, which in turn could affect the European and American markets. It is a Presidential election year, and that promises all sorts of highs and lows based on performance in primaries, scandals and issues that arise during debates, and more intense scrutiny of future economic plans by the electorate. Laws being enacted or repealed, such as concerns over possible repeal of the landmark Healthcare omnibus, cause concern in the market, and hence much analysis and reporting. In short, if you're looking for bad news you can find it easily and all the time. If you're looking for good news, you can find it fairly easily and a lot of the time.

American Capital and its competitors have less control over this type of news as it is not issued from them. There is in some cases knowledge that these unscheduled news bytes will appear, as speculating about the future of healthcare, for example, is being done openly by everyone. I don't know that I favor American Capital posting anything in "defense" of negative economic news, but I would certainly wish the management firm to be analyzing and preparing their business plans with any known information in mind. Both American Capital and CYS Investments have shown a positive increase in stock price for the past year, while Hatteras remains around even, ARMOUR a little low and Invesco substantially under its price from last year.

Of course I'm not suggesting we ignore all the news that comes our way regarding the market, stocks and REITs we own, or about our world in general. However, the anticipation to upcoming news can cause a doubly-bad effect, especially with something that has already been considered likely by the public. Say we hear before the official announcement that unemployment rates are not as low as for recent months. We already know this, but now feel dread because it seems more real, and already start reacting to the market. Then the actual report comes out, telling us what we all already anticipated, and the market reacts again to the verification of this news. Further, seeing the market react twice can cause more panic. How I wish the market did not react so much to feelings, but it does. Although I don't take the highest risks among my peers, they are up there. Investing with the long-term in mind when retirement for me is still 30 years down the road keeps me focused, and not as susceptible to the reactions of the immediate panickers.

I believe that American Capital still could have what it takes to do well, and the immediate drop in prices of virtually all the REITs and other stocks these past couple days can be attributed in part to the overload of information that came all at once, the "double dipping" of bad news, and the general uncertainty. American Capital to me is still a good REIT and it and CYS should keep doing what they're doing. Hatteras may be happy with staying even for this year, as that is not necessary a bad thing, but will want to pay close attention to its peers. ARMOUR and especially Invesco may want to strategize the encouragement to buy while their prices are lower. REITs can still be a great investment, and sticking to what they know and not overreacting when the public does will possibly be the key to future success.

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