Dynex Capital, Inc. (NYSE:DX) is a mortgage real estate investment trust, or mREIT. The company invests in mortgage-backed securities, or MBS, securities whose income is based on the performance of pools of mortgages. Those securities include both residential mortgage backed securities, or RMBS, backed by residential mortgages, as well as commercial mortgage backed securities, or CMBS, backed by commercial mortgages. As of the end of June 2020, 97% of Dynex's MBS investments were protected from principal loss by Fannie Mae (FDDXD) and Freddie Mac (OTCQB:FMCC).
I've written two recent articles about mREITs Ladder Capital (LADR) and Anworth Mortgage (ANH). Both those articles were written because those mREITs look cheap. The companies trade at steep discounts to their book values and have high dividend yields.
Dynex Capital does not look cheap. The company trades at a price to book ratio of 94%. In contrast, Anworth and Ladder have, respectively, P/B ratios a little over 60%. This means each dollar of their stock buys far more of the book value, or equity, of those companies. Those companies also have double digit dividend yields compared to Dynex's yield of around 8%.
That said, as in life, in investing you often get what you pay for. In several recent articles, I've described two common types of investment opportunities:
- High quality companies trading at a modest discount to intrinsic value.
- More average companies trading at a much larger discount to intrinsic value.
Average companies trading at a large discount often offer the highest immediate returns. After all, a company trading at a small fraction of its intrinsic value can double, triple, or more an investor's money in the short run. All that is necessary is for whatever is causing the undervaluation to end and for valuations to return to normal. This often takes only a couple of years.
