The Bullish Case for MFA Mortgage Investments

I mentioned last week the technical strength in the Mortgage REIT market [Thank You Readers - Found a Bull Market - 4 Mortgage REITs]. I did a lot of digging last night (and still plan to do more) but I decided to make the plunge with one of the names on Friday. I chose MFA Mortgage Investments (MFA), and began a start position of 1.0% of fund @ $10.89.

I also have considered:

1. Annaly Capital Management (ANY)
2. Capstead Mortgage (CMO)
3. Anworth Mortgage (ANH)

Readers mentioned Chimera Investment (CIM) as another way to invest in this trend, but I have not looked closely at it yet.I also discovered, lo and behold, an ETF from iShares which is a quick and easy way to get all the major players in one ETF: iShares FTSE Mortgage REITs (REM). So I considered that as well.Playing any of these companies is essentially a bet on the competence of management so it not quite so easy to model that like you would a normal business. So my first inclination was the ETF. But when I looked at the composition I saw:

1. Annaly Capital 24.7%
2. Thornburg Mortgage 9.5%
3. MFA Mortgage 8.0%
4. Redwood Trust 6.5%
5. Capstead Mortgage 4.8%

So this ETF is heavily weighted in the top handful of names, especially the top position, with a quarter of weighting toward Annaly. Since Annaly is a Cramer pick it probably has some of its upside already within the stock performance... and I already own the 2nd name in this ETF, which I started this week (how ironic?) [Beginning Stake in Thornburg Mortgage (TMA)] So buying this ETF would be a 35% stake in 2 positions, one of which I already own.So of the remaining 3 choices, MFA Mortgage is the largest (almost double in market cap vs CMO or ANH), and the other 2 were up quite a bit anyhow - Capstead Mortgage up nearly 10% - so maybe if I had been ready to buy yesterday I'd do a basket of MFA Mortgage and Capstead Mortgage. Again, I have nothing scientific to offer you - the prowess of management will determine ultimate success. I want to have exposure to the trend overall and judging by the 3 month performance of the 3 names I was considering (as seen below) - they are all generally in the same ballpark. Since I am buying the largest of the 3 I considered, I'll pass up a little return, for hopefully some stability.Looking at MFA Mortgage Investments specifically, we have stellar relative strength and a stock in a clear uptrend. Although I initiating a position today near $11, I am hoping for a pullback to $10 (or even less) if possible, to add more. Much like with Thornburg Mortgage.

Due to the nature of the business, I am not putting a lot of stock in the earnings estimate but 11 analysts follow MFA and have a $1.11 estimate with range of $0.82 to $1.55 range. So even at the bottom end of that range it seems to be a reasonable valuation.

Again, these 2 purchases this week (MFA & TMA) are my way to participate in the financial "boom" in mortgages caused by Fed cuts and LIBOR rates falling, without exposing myself to bigger (non pure play) banks with a lot of potential writeoffs still coming down the pike, or home builders who still have major issues ahead. 

While the latter 2 sectors are good for short term trades (which I might attempt) from time to time, I am hoping the areas I began positions in this week can be more of long term type of positions, which I can retain a core position for quite a while. Last, these type of positions should have little correlation with the type of stocks that make up most of my portfolio (or so I hope) so when they zig the rest of my portfolio might zag and I have more stability overall.

The risk for positions like this is they have come a long way off of very oversold levels, but the reward is these sectors, relative to where they were even 7-8 months ago, are still extremely sold off. But technically, these are some of the strongest stocks in the market and I love relative strength.

Disclosure: Long Thornburg Mortgage, MFA Mortgage Investments in fund; no personal position

Comments

[haydete:]

Thanks for the REM hint.

2008 Feb 11 09:26 AM