When any publicly traded company misses earnings, such an action tends to result in a sell-off unless there is significant news countering such behavior. On Monday, November 5th, one of the most well-known companies within the Mortgage REIT sector missed earnings and as a result, I wanted to examine several of the roadblocks that could be ahead for long-term investors.
Annaly Capital Management (NLY) which "invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans," reported pretty dismal Q3 Earnings ($0.45/share vs. estimates of $0.47/share) on Monday November 5th. In the wake of the company's obvious miss, shares have been trading down as much as 3.60% in the last 24 hours.
Are there any negative catalysts investors should consider when it comes to Annaly? I think there are two key catalysts concerning not only Annaly Capital but the entire Mortgage REIT sector as a whole. The first of these negative catalysts concerns the Federal Reserve and the second concerns the company's recent share buyback activity.
The first negative catalyst concerns the form of the Federal Reserve and its role as pseudo-Mortgage REIT which includes the purchasing of an additional $40 billion of mortgage backed securities each month. Considering the fact Annaly, American Capital (AGNC), Chimera (CIM), and Two Harbors (TWO) all engage in a similar practice, such an action by the Fed directly affects not only the revenues of each firm but the profits as well. Based on Annaly's Q3 results, it is clear that both revenues and profits were affected, and the heavily attractive dividend distributions of not only Annaly but the remaining firms in the sector should also begin to gradually feel the pain.
The second negative catalyst concerns the recent share buyback program Annaly Capital has engaged in. In most cases share buybacks are a very good thing for potential investors as they tend to enhance the current share price of shares, but in this case I think they actually hurt the long-term strategy of any investor examining high-yield positions. For example, "a share buyback is the repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake." Such an action would normally be welcomed with open arms, except for the fact Annaly Capital finds itself up against the buying power of the Fed.
Is there a silver lining in terms of the most-recent earnings miss by Annaly Capital? The silver lining comes in the form of a short strategy. If the company continues to demonstrate a downward trend in terms of earnings estimates over the next 12-24 months, I'd look to actually short the stock at current levels. By shorting the stock at around $15.75/share, I'd look to cover my short at between $15.00/share and $14.75/share, for roughly a $.75/share to $1.00/share profit. I think the downward potential is much greater than the upside potential, even though the company has announced some very significant changes to its board of directors.
Additional disclosure: I am LONG: CIM, AGNC