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Anworth Mortgage Asset Corporation Message Board

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  • david4801 david4801 May 10, 2004 11:04 PM Flag

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    TODD'S TAKE: An ugly day on Wall Street was especially nasty for the Mortgage REITs in our Income Portfolio. As noted above, the selloff in the market is unbelievable, but the moves in Mortgage REITs show that for this sector the market has lost its marbles. The proof is in the table below:

    Company Current Book PB
    Name Price Value Ratio Yield
    Annaly Mortgage Management $16.34 $13.45 1.2 12%
    Anworth Mortgage Asset $10.61 $11.55 0.9 14%
    Friedman, Billings, Ramsey $16.70 $10.18 1.6 8%
    MFA Mortgage Investments $8.36 $8.64 1.0 12%

    In the case of Anworth and MFA Mortgage, the stocks are now trading BELOW their book values. This means that they're trading below their net worth! Look at the price-to-book ratios, and you see that they're unbelievably low, in some cases below 1.0. Historically, financial stocks have traded at 1.6 or higher.

    Now look at the yields. At a time when companies around the U.S. have been boosting dividends, and shareholders are responding positively, Mortgage REITs still stand out from the pack with awesome yields.

    What investors have lost sight of is that in a changed interest rate environment, Mortgage REITs are going to do better than almost all other Financial Services firms. While profits could decline, these companies are not going to lose money. They will be profitable in good times and bad, whether short rates are higher or lower. There's no shortage of mortgage-backed securities, the assets that the company's buy. And even as rates are changing, the spread between the rates at which they borrow and the yield on their assets means they'll continue to bring in huge profits.

    In light of the exodus from these stocks, there are a couple things to keep in mind. Even in the toughest business climate, these companies are equipped to bounce back from tough times much faster and much more powerfully than just about any other kinds of company. We saw this last year, when high prepayment rates hurt profits. It took them one or two quarters to get over that. Compare that to the slump in Telecom or Technology, where the fallout has been massive and drawn out for years.

    Next, if the selling pressure persists, and they continue to trade below book value, watch for these companies to sell some assets and buy back stock. Why? Because stock buybacks are accretive to book value. Period.

    THE BOTTOM LINE: The Mortgage REITs in our Income Portfolio are below their Alerts. But we have yet to see a compelling argument that justifies the selling we've seen in the sector. No matter how you run the math -- by earnings, yields, book value, and so on -- Mortgage REITs are tremendously undervalued. This is especially important because their profit-making capabilities are generally unchanged, despite what the market says to the contrary. The profit upside remains strong, and room for profit-and yield-driven appreciation is only getting bigger.

    Check out the details of these companies on our site, and we're confident you'll realize two things: First, that you should own more of these stocks. And second, that the most important thing a REIT investor needs to generate big gains over the long term is patience.

 
ANH
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