- While a further delay in rate hikes can't be bad for residential mortgage REITs, the sector's still had a rough year -- and not all REITs are likely to appreciate equally when it does recover.
- FBR & Co. is of different minds on valuations, particularly when it comes to Annaly Capital Management (NLY +1.1%), a late-summer favorite that's rallied 9% in the past two months in large part due to strong news from its Aug. 5 earnings, including a $1B buyback.
- FBR's Daniel Altscher and Cole Allen rate Annaly at Underweight, with a lot of positives baked in already -- "although very little of what we discussed ... has actually happened yet as far as we know, so we think the market has given the stock a lot of credit for what it could do."
- It's trading at a premium to its group, and with new rate pressures, "it’s a worthwhile reminder that we think Annaly is among the most exposed names to prepayment risk with its 30-year fixed rate heavy agency MBS book."
- The two rate Two Harbors Investment (TWO +1.2%) at Overweight, though -- again on valuation, which "at this level is at the bottom 1% of the company’s daily historical range since its IPO in 2009, and historically buying TWO below 90% of book value has generally been a good 'floor' level on the stock."
- Capital at Two Harbors is flowing out of MBS to more value-added businesses, and with its agency book focused on prepayment protection, it faces less risk from a refinancing wave than Annaly, they wrote.