Larry Summers May Have Saved Battered High-Dividend Mortgage REITs

24/7 Wall St.

It was no secret that Larry Summers, the former candidate to replace Ben Bernanke as the chairman of the Federal Reserve, was no big fan of the current easy money policies. The two remaining candidates, Janet Yellen and Donald Kohn, helped shape the current strategy and are the much favored candidates by Wall Street. One of these two is very likely to be named soon by President Obama as the next Fed chairman.

Mix that change in the Fed scenario to the fact incoming data continues to indicate a very sluggish improvement in the economy, and you may see only a slight tapering of the quantitative easing (QE) at this week's meeting of the Federal Reserve. Boutique research and trading firm Compass Point thinks this may bode well for the quality mortgage real estate investment trusts (REITs) that have been absolutely hammered as interest rates have shot up. It also says while non-agency investors are not immune from higher interest rates, the current sector valuation combined with a well-hedged portfolio and significant exposure to an improving economy keeps this as the preferred investment subsector. The firm initiates coverage on some new names and upgrades others.

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Dynex Capital Inc. (DX) is a top new stock to buy at Compass Point. This is a name that is widely liked on Wall Street and has been murdered along with the rest of the sector. Compass Point has a $9.50 target price for the stock. The Thomson/First Call estimate is at $9.45. Investors are paid a 13.8% dividend.

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Ellington Financial LLC (EFC) is another quality name initiated as a stock to buy at Compass Point. This top mortgage REIT trades right at its book value and has consistently paid high dividends. Compass Point has a $26.50 price target for the stock, while the consensus target is $25.50. Investors are paid a 14.0% dividend.

MFA Financial Inc. (MFA) is the third of three names that are started as stocks to buy at Compass Point. Long considered one of the top agency mortgage REITs, the stock was punished along with the entire sector. Compass Point has an $8.50 price objective for the stock, and the consensus is at $8.50 as well. Investors are paid a 12.0% dividend.

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Armour Residential REIT Inc. (ARR) is upgraded from Neutral to Buy by the Compass Point analysts, and it may have the most upside potential of any of the battered sector names. It certainly has one of the highest yields of all the stocks at these bargain basement levels. Compass Point has a $5 price target and the consensus is at $4.95. Investors receive a staggering 20.7% dividend.

Western Asset Mortgage Capital Corp. (WMC) is also nudged up from Neutral to Buy. Management noted in its recent quarterly report: "Since our initial public offering in May 2012 through June 30, 2013, we have delivered an economic return (calculated as change in book value over the period plus dividends paid) of 8%, despite challenging conditions for investing in Agency RMBS. We believe our ability to this result over that time frame is a testament to the strength of our security selection and hedging strategies." Compass Point agrees and has a $17.50 price target. The consensus target is $16.50. Investors are paid a huge 22.4% dividend.

In its research, Compass Point also continued to be very positive on these other top mortgage REIT names: Two Harbors Investment Corp. (TWO), AG Mortgage Investment Trust Inc. (MITT) and Apollo Residential Mortgage Inc. (AMTG).

The mortgage REITs, despite being a huge target of short sellers, are not going to zero. It is very clear that hedge funds have targeted the stocks constantly with bear raids, and panicked investors have fled in droves. They will have to cut their distributions, and investors should expect that. Good names that are trading near book value and are properly hedged should not only provide solid income streams, but may have huge upside potential if the economy continues to be tepid.

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