Can we just stop panicking for one trading session? I have been inundated with inquiries regarding the trading action in Javelin Mortgage (NYSE:JMI) this month, particularly over the last few sessions. The pain has been real, and I think I may have inadvertently caused some of the panic. Two weeks ago, I wrote an article on Javelin stating that Javelin would keep pace with Annaly Capital (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC) this quarter and that Javelin's earnings would be strong. Where I think I may have spooked some readers is that I cited Javelin had an issue covering their dividend in Q2. I think some are blowing my prior article out of proportion. Yes, I was concerned with Javelin not covering its dividend, because it has done just fine in past quarters for the most part, save the debacle of mREITs in 2013. The truth is that I am pretty positive Q2 was a one-time anomaly. JMI only had $0.41 in taxable income, but paid out $0.45. I stated that Q3 will need to be strong and I think it will be. But I was a realist and said if it was weak, it COULD lead to a dividend cut. While Q3 is pivotal for Javelin, I believe it will be a successful quarter. It is time to stop panicking. Yes, we have seen the stock drop from $13.50 to $12.45, a loss of 8% this month, and 75% of this loss coming since I wrote my article. But I will say that I am behind this company. And now, shares are incredibly attractive given that they are on sale.
A key metric: The interest rate spread
First off, JMI has a much more attractive interest rate spread relative to NLY and AGNC. Remember, the wider the spread, the better the potential for JMI's earnings to be strong, and subsequently, share prices to increase. The interest rate spread is simply the average yield on assets minus the cost to purchase those assets. Well, JMI's average asset yield on its agency security portfolio was among the industry leaders 3.2%, while average cost of funds in Q2 was 1.5%, generating a net interest spread of 1.7%. In contrast, for example, NLY only had a net interest spread of 1.26% in Q2. Clearly, JMI has the better potential. That's one reason I like the sell-off as an opportunity heading into the end of Q3. But the stock is trading at a huge discount for the first time in a long time.
Javelin is definitely on sale relative to book value
Book value is a key driver of any given mREIT's share price. For the longest time in 2014, JMI was trading at or exceeding its book value. We need to be cognizant of an mREIT's share price relative to its book value. We also have to watch the trajectory of a book value. Specifically, we need to watch for a trend of declines. But JMI is not losing book value. Javelin's book value did only appreciate two cents in Q2 to $13.40. Thus, shares were trading at or a premium to book value to start the month of September. Into September and after my article this month, shares have dropped to the point where they are in a rare position. They are trading at a significant discount to book value. Currently, at the present share price of $12.45, shares are now ON SALE in my opinion relative to both the last reported book value AND its historical trading ratio with its book value. Currently shares are at a 7% discount to book. While this is not massive in general, the fact that JMI has traded at or above book value all year long rings of opportunity.
If you liked this stock a month ago when shares were trading at a premium to book value, then you have to love shares here, trading at a rare discount. The stock is down on no real news other than my prior article, which was not a negative piece. Sure, there may be some concerns over rising rates and the Fed, as usual, but the sector as a whole has been rather stable this month overall. Javelin is now presenting with an opportunity to acquire shares at an uncommon discount. Therefore, stop panicking, because if you like the stock, you should be doing some buying.
Disclosure: The author is long AGNC, JMI, NLY.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.