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Ready To Rise: Annaly Capital


  • The discount to estimated book value on Annaly Capital Management remains quite large.
  • Shares trade around a 25% discount to book value. We picked up shares of NLY to take advantage of the opportunity.
  • We closed out our position in CMO to fund the trade, capturing 59% in less than 3 months. We don't expect to repeat that performance.
  • There are risks to the current dividend level, but the discount to book should be more important. Investors who bought when spreads were wide and sold when they were thin got wrecked. Not a typo.
  • Beyond being bullish on NLY, we're also bullish on NRZ and NYMT.
  • This idea was discussed in more depth with members of my private investing community, The REIT Forum. Get started today »

We haven't had very many opportunities to get bullish on the common shares for Annaly Capital Management (NYSE:NLY).

Since Annaly Capital Management is a mortgage REIT, we build our analysis around book value and the price-to-book ratio. This has been a very successful technique over many years.

Shares often carried a price-to-book ratio greater than we wanted to see for buying opportunities. However, there has been a substantial decline since late February. The book value fell substantially, but the share price fell much further.

Even after a rally from the lows reached in late March and early April, NLY is in a bullish range:

Source: The REIT Forum

NLY trades about 18% under the target "buy under" price of $8.30. That's a substantial discount to our target. They trade at an estimated discount of 24% to book value.

This is built on a recent estimate for book value of $8.30.

Note: Shares of NLY dipped on June 2nd, 2020, shortly before the market closed, increasing the discount from 24% to 25%.

Prior Outlook

We warned investors about the high valuation prior to the plunge:

Source: Seeking Alpha

We didn't know the pandemic was on the way at that point. We didn't get really concerned about that until the first few days of March. However, we did know shares were already trading at a premium to book value and the spreads were relatively thin.

Net Interest Spreads

If there's one thing too many investors like to focus on, it is the net interest spread.

The term refers to the difference between the cost of financing the portfolio and the interest earned on the portfolio. It is an important number, but it also gets WAY too much focus. For instance, investors were bidding up shares of NLY in February 2020. Remember, that was the single worst time to

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This article was written by

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Analyst’s Disclosure: I am/we are long NLY, NRZ, NLY.PF, NLY.PI, NYMTM, NYMTN. 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.

We trade our positions in mortgage REITs actively to take advantage of an inefficient market. This is a critical part of our strategy for the sector and relies on intense research. We may trade any of our positions abruptly if we see a change in fair values throughout the sector.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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