BUY – Annaly Capital Management, Inc (NYSE: NLY)
Annaly Capital Management, Inc. (NLY) is one of the most pure stock plays on further interest rate cuts from the Federal Reserve. It’s also a favorite position for institutions and has had a nice run up in the last six months, but it has room to still appreciate and sports a nice dividend yield to boot.
Annaly operates as a real estate investment trust (REIT) and invests primarily in mortgages through collateralized mortgage obligations (CMOs) agency callable debentures, and similar portfolios of mortgage pool loans. NLY net income is a result of the interest rate spread between its investments and its capital borrowing costs. Thus, whenever the Federal Reserve cuts interest rates it is an automatic increase in Annaly’s margins at deployed capital.
In the current environment with the sub-prime lending crisis, it is also important to recognize that the bulk of Annaly’s investments are purchased through agencies such as Fannie Mae and Freddie Mac. And regardless of the interest concerns and defaults of individual mortgages, the federal government would not be willing for these agencies to default on their payments. So Annaly does not take the investment risk of their portfolios.
In effect, Annaly’s profitability is a direct play on the direction of interest rates.
Earnings increased 150% in 2007, with an expected additional increase of 90% in 2008. This should support the stock price for the foreseeable short term future. In addition, NLY just raised their dividend rate again, and is now yielding about 7.4%. With even a modest amount of capital appreciation from the $18.50 area to $19.44 in 12 months would provide a total return of 12.5 % assuming no further increases in the dividend.
I am however, neutral on its recent price increase in the stock. Although I have a small position already, I have recently placed limit orders to buy at $18-$18.20 per share. I would like to see the stock retreat this 3-4% to improve the appreciation potential.
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