Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): The Ups and Downs of the End of QE3

Last fall, Annaly announced a $1.5 billion share buyback program and American Capital announced a similar $500 million buyback. Both programs indicate the company will buy shares when they dip below book value. These huge buybacks have the negative effect of tying the share price to a declining book value.

Potential investors may be better off waiting for a better buying opportunity after book value stabilizes. Once the companies replace their existing investments with new, higher yield investments, both companies will be poised to outperform.

In the meantime, those itching to get into mREITs may be better served by a company that invests in short-term securities. Capstead Mortgage Corporation (NYSE:CMO) is one of the most defensive names in the industry.

Its book value is least likely to change as a result of changes in monetary policy. This is evident in the company’s last quarter, when its book value actually increased slightly, while its long-term bond holding counterparts all saw dramatic falls in book value. On the other hand, the short-term securities strategy won’t allow Capstead Mortgage Corporation (NYSE:CMO) to take advantage of the future increase in spread.

I currently own shares of Annaly Capital Management, Inc. (NYSE:NLY). But in the next three or four months, I may replace part of my position with Capstead Mortgage Corporation to preserve capital. I’m usually a buy and hold investor, but when the underlying story changes – for example, from decreasing to increasing long-term interest rates – it’s time to make some adjustments.

The article The Ups and Downs of the End of QE3 originally appeared on Fool.com and is written by Adam Levy.

Adam 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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