Annaly Capital Management: A Strong Buy In The mREIT Sector

| About: Annaly Capital (NLY)
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The title of this article says it all. Annaly Capital Management (NYSE:NLY) is a strong buy, right now, in my personal opinion.

I keep seeing the price dip, and all the negative stories about mREITS pop up, as well as a few positive ones with caveats, so naturally I need to put my own 2 cents in, and offer up my point of view for consideration.

First let me say that from what I can see, absolutely nothing has changed since NLY announced its last earnings report and cut its dividend from $.65/share to $.60/share and now.

First, here are just the basics on NLY as of today:

NLY: Price- $16.16/share, Dividend Yield: 15.20%, ESS Rating: Neutral

We have known all of the risks associated with every mREIT, so here they are, along with my rebuttal:

The Reality of The "Situation"

1) Operation Twist might not have begun in earnest yet, though the mere mention of it sent shivers down the spines of mREIT stock holders. The reality, however, was always that it would have a minimal impact on the 10 year Treasury yield. The last time Twist was used, it had a .10-.20 basis point impact. Nothing that would spell the end of profits for NLY.

2) As of yesterday, The 10 year T bond yields about 2.13% which happens to be slightly above where it was when NLY announced earnings, and higher than when Operation twist was announced. I believe NLY is still increasing their earnings. Since we are still playing the hand the Fed dealt us with a promise to keep short term rates near zero for about 2 years at a MINIMUM, I cannot find that flat yield curve to alter anything thus far.

3) The SEC asked for comments, and all of the CEOs of every REIT company replied, as well as countless regular folks. I believe in my tiny brain, that this (SEC "thing") was a red herring and will lead to absolutely nothing. If the tax status were to change, a legitimate business sector would disappear. Not to mention the millions of people who have relied on the faithful dividends that have been paid year after year. Of course, NLY is among the most consistent and transparent of any mREIT.

4) HARP, HARP 2.0, HAMP, MHAP, have all been big failures. The number of permanent loan modifications is around 850,000 nationwide, out of millions upon millions of underwater home owners. Nearly 42% of all mortgages written since 2005, are under water. The simple fact is that the banks do not want to lend. They make it extremely difficult to obtain a first mortgage, let alone a re-finance.

If the banks did not want to lend and re finance an /or modify existing mortgages at 4.5%, what makes anyone think they want to at 3.5%, or 2.5% or ANY low rate today. It is quite simply, not profitable, and too risky for the return.

I also read that the banks are not even ready to take any documentation for the new HARP 2.0 program. Our Government has not provided firm details, even now.

In my opinion it never will be ready, and if it is, will have the same success as the first go-around. A dismal failure. Keep in mind that there are even stricter requirements for THOSE loan modifications to even qualify!

5) The foreclosure rate has picked up. I can see this impacting mREITS earnings a tiny amount because even though they have picked up, it was simply due to the backlog of unpaid mortgages already existing. The pipeline is less full, but that's about it, and in my opinion has not impacted NLY in any major way.

My Opinion

I am well aware of all of the risks of REITs these days, and given that they are in the financial sector, NLY has paid the price. In terms of its PPS anyway. I cannot find any evidence right now to support the share price being beneath book value, nor can I find any evidence of deteriorating earnings.

I realize I do not know everything and they might even need to cut the dividend again given its 2012 EPS outlook. As I look closer though, if nothing changes we MIGHT be surprised by even stronger earnings.

In my opinion, NLY is a buy at these prices. I hope I am right!

* Please do your own research and do not make any investment decisions based solely upon the opinions of others, myself included.

Disclosure: I am long NLY.