Chimera: Highly Undervalued And Ready To Jump Higher

| About: Chimera Investment (CIM)
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REITs are immensely popular amongst investors seeking an income, especially those in retirement. However, selecting the right REIT for a portfolio may be a daunting task primarily because most REITs investment vehicles are the same, which means that returns amongst competitors could be similar. Nonetheless, this does not apply to Chimera (CIM) because its investment strategy differs from other competitors by investing in private mortgage-backed securities, as opposed to the typical investment approach with government MBS.

Chimera's management is highly efficient at collecting its receivables on a timely manner; management is collecting cash from customers about every 20 days. Competitors American Capital Agency (AGNC), Annaly (NLY) and Anworth (ANH) collect cash from customers every 140, 48, 45 days, respectively. Collecting receivables quicker means higher liquidity because there is more cash on hand. Most importantly, it is a sign that Chimera's customer accounts are not likely to go into collection. Conversely, there is a higher risk with Agency because of the longer time frame it takes management to collect monies owed from customer accounts.

Revenue at Chimera has gained a lot of momentum, increasing at a CAGR of 284% over the last four years. Year to date, Chimera has appreciated about 11%. It distributes an annual dividend of $.044 with a yield of almost 16%, one of the highest in the REIT industry. Looking back for a longer period of time, the stock has been on a bearish trend since the beginning of 2008, right after its IPO in late 2007. Comparing it to Agency, Chimera has had a spectacular underperformance since its inception. To be more precise, since its IPO, Chimera has created no value for investors, returning a loss of 81%, while Agency has returned 52% to investors who invested in the IPO. Profit margins are almost identical near 90% for both stocks.

Chimera is undervalued compared to its competitors. See the chart below.


Price to earnings

Price to book (mrq)

Price to sales (TTM)

















Yes, as I alluded earlier, the stock has been severely battered by the bears in the past. However, I believe the stock is attractive with its current fundamentals (and technicals), thus I think it is a good time to buy the stock because it is attractive and offers a strong potential to the upside as long term interest rates may rise.

A major concern and risk for investors is the possibility of an increase of short term interest rates. However, as of now, the Fed has pledged in keeping short term interest rates near zero until 2014. I believe long term interest rates are more likely to increase before short term increases. This can happen primarily because interest rates are now stagnant as they have been on a down trend for over the past decade, suggesting the "spread" for REITs might widen and lead to higher earnings. Because this is a primary mechanism to make money for REITs, is long-term rates do increase they should have more cash to distribute to shareholders in the form on higher dividend payments.

In an article at the beginning of the year, the author claims that "Annaly's executives are incentivized to make its shares as attractive as possible to ensure it can continue selling new issues." Looking at their compensation packages for 2011, management at Annaly enjoys the highest remuneration within the industry. If this is the case, agency problems between shareholders and management could arise in the future, which may trigger investors to seek other REITs to park their money because as the as author states, "at some point, something's gotta give."

Most recently, for the month of March, Chimera was within the top ten stocks in the financial sectors with the highest yield. The graph displays its performance during the month of March compared to the previous five months. None of other REIT's competitors mentioned in here were included in this research.

Chimera's management has made the right risk management moves to navigate during turbulent economic times. For example, it is keeping a lower debt to equity ratio of 184.86 (compared to 796.66 for Agency) to protect itself from the higher risks associated with private MBS.

Final thoughts

I believe Chimera is trading at an attractive price of just below $3, has an enticing yield, and is undervalued compared to its competitors (see graph above). Furthermore, as the economy strengthens, long-term interest rates are more likely to increase, suggesting higher revenue and dividends for Chimera as its spread widens. As the real estate market becomes healthier with the help of a brighter outlook for the economy, the private MBS bonds held by Chimera have a higher upward potential that comes along with the higher risk of holding these securities. I believe right now is a good time to step in and add some shares of this stock to your income portfolio. The risk is low and the reward for profits is higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.