At the end of March, I did a portfolio reallocation, exiting from Chimera Investment Corporation (CIM) and entering Armour Residential REIT (ARR).
Let us review the results, one quarter later, and see what the outcome was.
The theory on exiting Chimera was explained in this article. On the basis of shrinking interest rate spreads, no new issuances of stock to raise capital as an attempt to grow, and problems in producing last year's annual report, I exited Chimera at a price of $2.94 on March 30th.
As I write this article, the price is $2.34. The dividend has been cut to 9 cents per share, which was one of the things I was afraid of at the time. Even though I did miss out on $.20 per share of dividends (11 cents in March and the most recent 9 cent dividend, which has passed), I am still better off than I would be if I had sat on the trade.
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Even though I did not exit at the exact optimal moment, I still cannot be too sad about checking out when I did.
Armour Residential REIT was the topic of this article. In that same time frame, I formulated the theory that ARR would do better. The company had adjusted its hedging strategy to make it more resistant to changes in interest rates. It had issued some new stock so as to grow, and I entered the stock at 6.72 on March 16th, right after the March dividend was paid (ARR pays its dividends monthly). I've collected two rounds of dividends since then (a third is on its way at $0.10 per share) and the current stock price is $7.15, which is a roughly 5% capital appreciation, and including my 30 cents of dividends, gives me about 11% return in a little more than a quarter.
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We've applied a couple of general rules of thumb to these mortgage REIT investments over the last few months:
1. Growth is good. The companies that are doing new issuances are the companies to be in, because expanding their portfolio helps their cash flow and keeps their dividends secure. When these companies stop doing these new issuances, they tend to stagnate, and eventually cut their dividends.
2. Exit just before the dividend is paid, and enter just after. It is a bit counter-intuitive, because you don't get to collect one round of dividends, but in both of these cases, the decline in share price was in excess of the value of the dividend, so you are better off without it.
Of course, the world is chaotic and there are no guarantees on anything, but I do have something positive to report to the neighbors as I stand around the grill on Wednesday, and quite possibly, a strategy going forward.
Disclosure: I am long (ARR).
