Buy This Mortgage Stock Now, Before Its Buyback

| About: AGNC Investment (AGNC)

Current shareholders should hold American Capital Agency (NASDAQ:AGNC) long-term, and interested investors may consider initiating a position on this mREIT in the near term. American Capital Agency has some of the strongest metrics in the industry, one of the highest dividend payouts, and it recently released a strong third quarter earnings report. American Capital Agency also recently announced its intent to execute a $500 million buyback by 2014. Management is confident in its ability to endure the prepayment environment created by QE3. American Capital Agency is one of the best candidates for ROI and capital appreciation in the long term.

Annaly Capital Management (NYSE:NLY), Two Harbors Investment (NYSE:TWO), CYS Investments (NYSE:CYS), and ARMOUR Residential REIT (NYSE:ARR) are the firms most comparable to American Capital Agency. American Capital Agency Corp's price is around 7.7 times earnings, 6.4 times sales, and 1.07 times its book value. Annaly's 92.9 price-to-earnings ratio, ARMOUR Residential's 25.2 price-to-sales ratio and Two Harbor's 1.18 price-to-book ratio are the highest among these firms. CYS Investments' 3.7 price-to-earnings and 0.89 price-to-book ratios are the lowest among the firms; Annaly's 4.4 price-to-sales ratio is the lowest among the aforementioned. American Capital Agency's debt-to-equity ratio is around 7.85; ARMOUR Residential's 8.92 debt-to-equity ratio is the highest among the firms.

American Capital Agency's $4.16 EPS is the highest among the firms; its EPS has declined 36.3% in 2012, and it is projected to increase 12.5% in 2013. Its dividend yield is around 15.6% and its annualized dividend is around $5.00 per share. American Capital Agency Corp's ROE is around 12.1%, its operating margin is around 49.7% and its profit margin is around 49.4%. It's 1.1% float short and 0.53 short ratio are the lowest among these firms. Its beta is around 0.4 and its average volume is around 7.3 million; its 2.1 relative volume is the highest among the firms. The stock has increased 27.7% YTD, decreased 6.8% in the past month and has declined around 9.6% since its last earnings release.

On its third quarter earnings release, American Capital Agency Corp reported strong results despite the headwinds created by QE3 for mREITs. Third quarter net interest income totaled $381 million, decreasing from $384 in the second quarter but increased from $232 million YOY. Comprehensive income for the quarter was a record $1.32 billion, increasing from $477 million, sequentially and $274 million YOY. Comprehensive income per common share totaled $3.98, increasing from $1.58 sequentially and $1.51 YOY. The third quarter increase in comprehensive income was primary due to $1.19 billion in unrealized net gains on available-for-sale securities. Third quarter economic return totaled $4.33 per common share; around 59% on an annualized basis. Annualized economic return for the first nine months 2012 was 41%.

American Capital Agency's portfolio totaled $89.6 billion at the end of the third quarter, realizing 7:1 leverage YTD and 7.1:1 leverage for the quarter. Fixed-rate securities accounted for $87.9 billion of American Capital Agency's portfolio, $1 billion in adjustable-rate securities and $0.7 billion in CMO's. Around 71% of its fixed-rate portfolio was agency securities under the Home Affordable Refinance Program; $28.6 billion in 15 year or lower fixed-rate securities, $2.7 billion in 20 year fixed-rate securities and $56.6 billion in 30 year fixed-rate securities. American Capital Agency's third quarter annualized net interest rate was 1.42% and 1.5% for the first nine months 2012.

American Capital Agency's third quarter CPR was 9%, decreasing from 10% in the second quarter but increasing from 8% YOY. The average portfolio life CPR at the end of the quarter was 14%, increasing from 12%, sequentially and 13% YOY; the increase was primary due to implementation of QE3 and record low mortgage rates. American Capital Agency's portfolio appreciated in the third quarter and the CEO believes the firm is in a good position despite the prepayment environment created by QE3. American Capital Agency also announced that once the repurchase price is less than its net book value, AGNC intends to buyback up to $500 million in common shares through the end of 2013.

American Capital Agency's second quarter 12% CPR was lower than Annaly's 19%; the average for the mREIT sector was around 20.3%. American Capital Agency's funds-from-operations (FFO) ratio increased 1,128% annually from 2008 through the second quarter to total $2.4 billion; Annaly's FFO only increased an average of 21.8%. American Capital Agency's price was around 2.5 times its FFO while Annaly's price was around 4.3 times its FFO. Aside from having one of the highest dividend yields in the industry, American Capital Agency has some of the best REIT metrics as well. This is noteworthy as QE3 is expected to put downward pressure on yield spreads for the mREIT sector.

Investing in American Capital Agency for the long-term is appealing because mREITs like this could realize a significant increase in interest income once higher rates begin to support wider spreads. Preparing for the impact of higher rates down the road could help investors realize significant capital appreciation and ROI while benefiting from one of the higher yields available in the sector. As low as rates remain low, this is an opportune entry point to initiate a position on reasonably valued mREITs like American Capital Agency. As it stands now, the Fed expects to keep interest rates low until 2015.

American Capital Agency recognizes that asset selection is critical to its future performance under the impending high prepayment risk environment. The buyback is being made in effort to offset some of the volatility its stock has experienced since the QE3's announcement. American Capital Agency's ability to maintain a low CPR through these headwinds underscores the effectiveness of its active portfolio management throughout 2012. Interested investors will benefit from initiating a position before the buyback and current shareholders should hold onto this stock as a long-term defensive position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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