Given this year's bond market trends, Q4's loss in book value has likely been restored, says analyst Merill Ross, upgrading to a Buy with $21.50 price target. He also notes the company's investment in mortgage servicing as a move likely to optimize future earnings (see management's discussion in yesterday's earnings call).
The stock market, says Ross, is pricing American Capital (MTGE +1.7%) as if MBS prices are likely to repeat this year what they did in 2013 (go down). "It is difficult for anyone with a shred of fiduciary responsibility to invest in an asset class that, by and large, destroyed value in such an epic fashion. However, when we look at MTGE and others in its peer group (REM +0.4%), value creation was positive; yet, share price action was strongly negative."
Trading at $19.47 at the moment, the stock is selling at a 9.3% discount to Dec. 31 book value of $21.47 (and book value is likely north of $22 by now).