Annaly Capital Management (NLY) may have seen better days with the new QE3 cutting into margins. As the stock seems to move out of favor with analysts how should one proceed at this point to invest or make money with the stock? The stock will still offer a good dividend but I believe the growth has reached its end point for now.
Annaly Capital Management declared a quarterly dividend of $0.50 per share, or $2 annualized. The annual yield on the dividend is 11.6 percent. Dividend cuts may be ongoing but the company is still doing pretty well.
JP Morgan recently downgraded the stock from overweight to neutral with a $17.00 price target that the stock is very close to right now. Some analysts have the price target close to where the stock is presently trading and with the new QE3 coming into place, this may further erode profit margins which have already been tightening up. Also, the ECB's OMT program may reduce the Euro risk and diminish the value of NLY.
Annaly may be exposed to higher prepayment rates than some comparable companies, and it is very likely its "spread income" may continue to come in lower, and this is what will eat into dividend payouts. Expect them to continue lower.
It is for this reason that I am taking investor sentiment to possibly shy away from the stock in the short term. Yes, the dividend over 10% is nothing to sneeze at and will continue to look good. But short term reaction from investors will be cold. Many will believe the stock had a good run and now they will look elsewhere for a better investment. And, because of NLY's size, there might be some better REITs out there with less exposure to QE3 to invest in.
The stock has leveled off as of late and could be just consolidating before it continues to move up. One observation is sure - the strong bullish movement of earlier this year no longer looks like it is strong. We have signs in the MACD of a negative divergence which is always a sign of a slow down when it stands alone like it is. The RSI indicator has followed the stock and continues to follow it without revealing anything or supporting the MACD. It now looks like Annaly will use the upper and lower Bollinger Bands as support and resistance. The direction at this point is questionable since the stock may have peaked or it may be moving sideways for a time.
The Options Play
The stock is presently trading at 16.89. I am looking for a pullback in the stock at this point as it adjusts to the sting of QE3 and in the short run, I do not see another bullish leg starting. For this reason I am looking for a bearish credit spread as a short term income play.
- Sell a January 2013 call with a strike price of 17.5 (priced at $0.17)
- Buy a January 2012 call with a strike of 19 (priced at $0.03)
- Net Credit to Start: $0.14
- Maximum Profit: net credit
- Maximum Risk: $0.84
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Annaly is falling out of favor with analysts.
- Dwindling dividend will not favor continued growth in stock.
- Looks like it has peaked.