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American Capital Mortgage Investment Corp. Message Board

  • oldschoolbuilder oldschoolbuilder Jun 18, 2013 10:35 AM Flag

    BV estimate and favorable risk/reward

    The stock price of MTGE embeds extremely onerous and unlikely assumptions and the stock presents a pretty good opportunity for those with a strong stomach. I can't make the claim that it can't go lower before it goes higher but the risk/reward from a total return standpoint is pretty favorable.

    BV at end of 1Q was $24.25. That included a capital raise mid-quarter at net proceeds of $25.40 to the company. That capital raise increased shares outstanding by about 60%. The equity allocation was 80%/20% agency/non-agency at the time but it is likely that shifted during the quarter. If a good chunk of the agency MBS was sold in late April/early May (after the April rally) then the BV impact of this was extremely positive given the subsequent decline in agency MBS values. Non-agency assets are at worst flat during the quarter on average I think. MTGE also has significant hedges that should have offset the decline in agency MBS somewhat during the quarter. Thus if you simply assume a 10% decline in equity related to agency MBS investments (probably much too onerous an assumption), and flat performance for the non-agency related equity (possibly too conservative as well), a 70%/30% average mix, then you get a 7% decline in BV for the quarter. That would put BV at 6/30 at $22.55. Simple math.

    The stock @ $20 goes ex-dividend in week or so. Hence the adjusted price to an investor today is close to $19.25 or so. That puts MTGE stock at a whopping 15% discount to quarter end BV. That essentially assumes continued degradation in BV in excess of the spread income being earned on the current portfolio. The duration gap, however, is already pretty modest after the move up in rates and MTGE (via AGNC) has indicated that its sensitivity to a further 100 bps or even a 200 bps move up in rates is somewhat low. MTGE should/will buy back stock here (and liquidate agency MBS to do so, if needed). This will boost BV further. The market has overreacted I think.

    Sentiment: Strong Buy

20.10+0.18(+0.90%)Sep 19 4:00 PMEDT

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