American Capital Agency Corp (AGNC) has been challenged recently as have all the Real Estate Investment Trusts. Tightening mortgage interest rates have squeezed profits and placed a damper on the outlook of future dividend rates for the REIT industry as a whole. Rates are still healthy and periodically one runs into a short term income opportunity to add to a long term position. This is one of those opportunities that I can identify by analysts' expectations of the stock.
Analyst Outlooks
Jefferies reduced its rating on American Capital Agency from Buy to Hold with a reiterated $34 (September 18th) price target. Its reasoning:
"With AGNC trading to a P:B multiple of 1.18x our projected 3Q12 book value, and our view that QE3 is now fully priced into the shares, we are downgrading the shares from Buy to Hold. Although AGNC has arguably the most savvy management team and the best total return over the TTM in the mortgage REIT space, we cannot justify adding to positions at these valuation levels."
On this day, the stock was just coming down off a high and ended the day at 36.77. After that the stock gaped down and proceeded to down to a low of 31.54.
Sterne Agee has an interesting take on the stock. Having just raised the price target to $34 (October 15th) and giving it a buy rating, here is the company's reasoning:
"We are upgrading the shares of AGNC to short-term Buy ahead of earnings report and into year end and establishing a $34 price target. In our view, the recent market volatility has given us a good entry price below book value and spreads on new investment - while lower - will take some time to influence the dividend level supported by undistributed taxable income and gains from this quarter."
On this day, the stock hit its low point of 31.54 which was also a very good support level. Sterne Agee saw an opportunity to possibly gain 10% on an upside swing. Remember how the analyst described it: a short term buy.
(click to enlarge)
Technically Speaking
While it appears many of these companies have fallen from grace, it also looks like the last leg down may have helped define a support area for AGNC. So it looks like we have a defined resistance level of 35.5 and a support level at 31.5. This last drop was much faster than the first one as the RSI indicator points to an over sold condition so moving up makes sense. The MACD indicator supports the strength of this move down just like the RSI since it entered bearish territory this time down but just barely skimmed it the first time down. Since this last drop was so steep and it actually moved through the bottom Bollinger Band frequently, I would expect the stock to have a slight recovery. I would be hard pressed to think the stock would continue to move down like this. Will it move sideways or continue down now? At this point I think it is safe to conclude it is not going to move way up again. But I am not yet sure about a long term bearish move down yet.
The Options trade
Presently trading at 33.04 and since both analysts are looking at a '34' price level, this may provide an opportunity for a short term income play to add to a long term position on a stock.
- Buy the December 2012 call with a strike of '33' (priced at $1.17)
- Sell the December 2012 call with a strike of '34' (priced at $0.62)
- Net Debit to Start: $0.55
- Maximum Profit: $0.45
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the Trade
- On the recent dip, looking a short term move up to capitalize upon.
- Market volatility should assist in stock's move.
