Annaly Capital: Outstanding Performance in a Down Market

This is a difficult market. Agricultural Chemicals work some days but I can't see getting into Mosaic (MOS) until the market breaks to the upside. Gold works some weeks, with Barrick Gold (ABX) and Newmont Mining (NEM) being my favorites. Banks move on certain days, and I have recommended State Street (STT) and Northern Trust (NTRS) in the past. But overall, this is a really tough market with next to nothing working on a continued basis.

More evidence of this bad this market is the new high list versus the new low list of the New York Stock Exchange and the NADSAQ. On Friday, the NYSE has 14 new highs while having 92 new lows. At the same time, the NASDAQ has 6 new highs and 157 new lows. Before it's safe to buy the momentum stocks again, these ratios need to reverse.

Then there's Annaly Capital (NLY). This mid-sized mortgage investment company out of New York is only $0.50 off its 52-week high. This company has stayed away from the subprime mortgage investments that have disrupted the operations of many banks and mortgage investment companies. The stocks has risen 48% over the past year.

Annaly also invests in real estate and is taxed as a Real Estate Investment Trust. New York real estate is one of the regions that has not had the downturn the rest of country is experiencing.

The dividend is a great 6.60%, beating almost all CD and savings rates across the country. Annaly has a Price/Earnings ratio of 16. But it also has a revenue growth rate of 162% for the current year. Analysts continue to raise their earnings guidance for the company. Over the past 90 days, the 6 analysts that follow the stock have raised the company's average earnings forecast for the current year from 1.95 to 2.63.

Disclosure: Author has a long position in NLY

Comments

[Jonnycars:]

I have followed Annaly for a number of years and know that they have a great management team. But some of the arguments here are flimsy. A 6.6% dividend yield and a 162% revenue growth are meaningless when trying to determine whether Annaly represents a good investment at this point.

The major driver of earnings and int turn the stock price will be the shape of the yield curve. Annaly's strategy works extremely well when we have a positively shaped yield curve and low interest rates overall which we have now. But any sign that the current interest rate environment reverts to more unfavorable conditions could be lethal for the stock.

I am not saying that there is going to be an imminent change in the interest rate environment. What I am saying is that there is risk here and one should be familiar with those risks.

Disclosure: I have no position in the stock.

2008 Feb 25 09:16 AM

[Gary Meade:]

This company does not buy sub prime; gee, I wonder why? Could it be on a more sane path? And if so how come other financial s did not understand this?

2008 Feb 25 09:21 PM

[stockpiler:]

I am long NLY since 2004, and have been adding all the up from the $12 range last year. I rode it down, due to the realization of the risks that jonnycars mentioned. I have to say that this is the ideal operating environment for Annaly, but they took significant steps during the inverted yield curve of two years ago to reposition their assets to perform better (not great, but better) if that trend continued or reemerges. What you buy when you invest in Annaly is a great, not good, management team with experience and very sound judgment.

One thing you're not doing, as the article's author suggests, is investing in NYC real estate. Annaly makes its money by buying MBS with actual or implied AAA rating -- borrowing short and cheap and then harvesting the yield differential from these high quality assets, mixed with fixed, floating, and ARM terms to spread the risk and provide performance in various environments. As of their last quarter, this spread was up to almost 1%, having tripled over the inverted yield days.

2008 Feb 26 02:44 PM

[BxCap:]

Wrong.

2008 Mar 06 10:47 AM