American Capital Agency Corp. (AGNC), Annaly Capital Management, Inc. (NLY): The Good, the Bad, and the Unknown

It’s important to keep in mind that book value is essentially the value of the assets on a company’s balance sheet. With mREITs, it’s not just an accounting number. It’s the actual liquidation value of the business. This means that both Annaly Capital Management, Inc. (NYSE:NLY) and American could sell their book of mortgages on the market today for around 33% more than its quote on the books.

The unknown

The main problem with the current “Fed tapering” environment is that the scale and timing is highly unknown. Now, mREITS use hedging instruments at all times, but the scale of interest rate moves is unprecedented. Put simply, no one can hedge against a daily interest rate spike of 8.5%, such as the one witnessed last Friday. If you consistently hedge against all risks, you will end up paying the majority of your earnings to hedging instruments. That’s why, uncertainty is really the worst enemy of the mREIT sector.

Looking ahead

Strange times often bring about lucrative opportunities. I believe that although the sector as a whole is highly volatile, buying shares of mREITS at discounts of more than 20% to book value will turn out to be a good idea. Invest accordingly.

The article Annaly Capital: The Good, the Bad, and the Unknown originally appeared on Fool.com and is written by Shmulik Karpf.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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