More on the Sandler downgrade of AGNC and ARR

|About: AGNC Investment Corp. (AGNC)|By:, SA News Editor

"The stock prices do not fully reflect the risks to the agency mortgage REIT model," writes Sandler O'Neill in its downgrade of American Capital (AGNC -1.2%) and Armour Residential (ARR +0.4%). The risks:

Price volatility in MBS, the overhang of what the Fed might do with $1.3T of MBS on its balance sheet, other MBS owners could become sellers - namely mutual funds and other mREITs, retail skittishness could widen discounts to book value even further, and the transition to a new Fed chairman.

While not cutting earnings estimates, Sandler does cut AGNC's price target to $21 from $25, and ARR's to $3.50 from $4.50.

The average book value/share of agency mREITs fell 4.5% in Q1, 14.7% in Q2, and "we don't think all the volatility is behind us." Book value could fall another 10-25% if some of the above risk factors play out. Additionally, Sandler expects the agency mREITs to trade at a 10-20% discount to book as long as the overhang of the Fed being a seller remains.

Earlier: The downgrade and Compass One's differing opinion.

Related ETFs: REM, MORT, MORL.