I also have considered:
- Annaly Capital Management (ANY)
- Capstead Mortgage (CMO)
- Anworth Mortgage (ANH)
I also discovered, lo and behold, an ETF from iShares which is a quick and easy way to get all the major players in one ETF: iShares FTSE Mortgage REITs (REM). So I considered that as well.
Playing any of these companies is essentially a bet on the competence of management so it not quite so easy to model that like you would a normal business. So my first inclination was the ETF. But when I looked at the composition I saw:
- Annaly Capital 24.7%
- Thornburg Mortgage 9.5%
- MFA Mortgage 8.0%
- Redwood Trust 6.5%
- Capstead Mortgage 4.8%
So of the remaining 3 choices, MFA Mortgage is the largest (almost double in market cap vs CMO or ANH), and the other 2 were up quite a bit today anyhow - Capstead Mortgage up nearly 10% - so maybe if I had been ready to buy yesterday I'd do a basket of MFA Mortgage and Capstead Mortgage. Again, I have nothing scientific to offer you - the prowess of management will determine ultimate success. I want to have exposure to the trend overall and judging by the 3 month performance of the 3 names I was considering (as seen below) - they are all generally in the same ballpark. Since I am buying the largest of the 3 I considered, I'll pass up a little return, for hopefully some stability.
Looking at MFA Mortgage Investments specifically, we have stellar relative strength and a stock in a clear uptrend. Although I initiating a position today near $11, I am hoping for a pullback to $10 (or even less) if possible, to add more. Much like with Thornburg Mortgage.
Due to the nature of the business I am not putting a lot of stock in the earnings estimate but 11 analysts follow MFA and have a $1.11 estimate with range of $0.82 to $1.55 range. So even at the bottom end of that range it seems to be a reasonable valuation.
Again, these 2 purchases this week (MFA & TMA) are my way to participate in the financial "boom" in mortgages caused by Fed cuts and LIBOR rates falling, without exposing myself to bigger (non pure play) banks with a lot of potential writeoffs still coming down the pike, or home builders who still have major issues ahead. While the latter 2 sectors are good for short term trades (which I might attempt) from time to time, I am hoping the areas I began positions in this week can be more of long term type of positions, which I can retain a core position for quite a while. Last, these type of positions should have little correlation with the type of stocks that make up most of my portfolio (or so I hope) so when they zig the rest of my portfolio might zag and I have more stability overall.
The risk for positions like this is they have come a long way off of very oversold levels, but the reward is these sectors, relative to where they were even 7-8 months ago, are still extremely sold off. But technically, these are some of the strongest stocks in the market and I love relative strength.
Long Thornburg Mortgage, MFA Mortgage Investments in fund; no personal position
2 comments:
Are you looking for capital appropriation or dividend?
Since 1998 MFA share price never cross above $10.85 although it currently pays a nice dividend 5.5%.
I'd like both.
Historical price does not concern me; historical PE ratio is more of an interest. It looks like these companies generally trade at 14-16 PE ratio over the long run. So if the $1.11 is true, than that would generate a $16.65 price by end of year 2008.
With that said, the thing I hate about 90% of financials is they are a black box - it is not like producing a widget where you can analyze gross margin, volumes, etc and make a framework for where you think EPS will be. Who knows if MFA can make $0.50 or $1.50 this year.
One thing I am amazed at, and makes me bullish is the large amount of stock many in this group have offered of late, yet the stocks continue to move up unabated. So a stock offering from my limited knowledge of this group would signify either a move to shore up balance sheet or a company seeing such opportunities they are doing anything they can to raise capital. I don't know the answer but investors seem to be thinking the latter. My gut, is there is a lot of opportunity out there from institutions who want to get this "real estate junk" off their books and some of these mortgage REITs might be able to get some very good deals. So that's the thesis I am working on, along with tremendous relative strength.
Last, I am trying to balance my portfolio a bit, so in the weeks when people think retail, financial, and homebuilder is the way to go, I have some stocks doing well in that environment.
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