The Anworth Madness

| About: Anworth Mortgage (ANH)
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Summary

We have identified a preferred stock whose recent price movements make no sense.

The current market price provides an excellent exit point for holders.

Buying at these levels would be extremely irrational.

The last few weeks can easily be characterized as choppy, bumpy, and whatnot. But all else pales in comparison to the insanity I have witnessed in some individual stocks. This article will bring your attention to one such product and continue the "head for the exit" series.

The Stock

The star of today's show is ANH-A - Anworth Mortgage Asset Corp. (NYSE:ANH), 8.625% Series A Cumulative Preferred Stock. So far so good, but let us take a closer look:

  • Call Price: $25.00
  • Liquidation Price: $25.00
  • Call Date: 11/05/2009
  • Maturity Date: None
  • Nominal Yield: 8.63%
  • Current Yield (as of 4/19/2017): 8.075%
  • Last Price (4/19/2017): $26.70

As you most probably guessed, I deeply doubt that the current yield can justify purchasing at these levels when there is such massive call exposure, and the last ex-dividend date was less than a month ago (3/29/2017), thus leaving the stock with very little accrued dividends under its belt.

It is perfectly logical to ask the following question, though: Why worry about a redemption of the issue when it has clearly been left outstanding long after the Call Date?

Good question, but there is a plethora of factors that make the current valuation absurd, and as we proceed, you will appreciate the rare exit opportunity this preferred stock is providing for anyone who is lucky enough to possess it.

Recent Developments

The daily chart of ANH-A that you will see below is the definition of madness for multiple reasons which we will pay a visit to after visualizing the madness in its full glory.

Source: Lightspeed Trader - ANH-A Daily Chart

Now, to follow through the chart properly, we see that prior to both ex-dividend dates (12/28/2016 & 3/29/2017), the stock is in an uptrend, which is perfectly normal. However, everything changes after the latter date, both in terms of valuation and volume.

Nothing unusual is observed until the volume picks up. And what truly dazzles me and makes absolutely no sense is the combination of timing and ferocity. Clearly, the buyer does not care about the price at which he will purchase the security, and this creates a rather obvious inefficiency. What is even more peculiar is the fact that this happened right after the dividend, while it would have made more sense a few days earlier.

Could the person/people buying at these levels know something that no one else does? They most certainly could, but speculating on the topic brings no value to us for two reasons:

  1. Our risk tolerance should forbid us from purchasing a Callable preferred stock trading $1.70 above par value right after paying out a dividend, regardless of the yield it provides. (Unless we know something!)
  2. Even if we knew something, the rest of the market most probably does not, and holding or buying at these levels would be the equivalent of attempting suicide.

To put things in perspective, we will take a look at a monthly chart of ANH-A and add some food for thought on our plate.

Source: Lightspeed Trader - ANH-A Monthly Chart

As you can see, despite the lucrative yield provided by this preferred stock, it has seldom seen the light above the $26.00 mark, or put in other words - it has traded on reasonable levels after the late 2013 10-year Treasury yield spike. And we are in a rising interest rate environment, at least for now. So even without adding value by going in this direction, it is not going to get any better in this regard.

Also, I feel obligated to clarify that my investment time frame makes this chart irrelevant, but long-term holders can find it helpful because it emphasizes on the unique exit opportunity provided to them.

Conclusion

Unless there is some tricky clause in ANH-A's prospectus, I believe that it does not take a scientist to figure out that it has been overvalued over the past few days. Fundamentally, there are absolutely no reasons supporting this movement, but someone out there has been on a buying spree, thus providing us with an excellent exit opportunity and inefficiency to act on.

I will be glad to hear opinions on the matter and see whether I have missed something.

Disclosure: I am/we are short ANH-A.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.