Since the launch of the third round of quantitative easing in September last year, the mortgage REITs sector has seen tremendous compression in profitability and dividend cuts. While there is no consensus on when these easing programs will end, the markets have started pricing it in. Given the mixed signals, mortgage REITs become an even more complicated investment decision. However, some insider buying makes it clear that the management is confident on the companies’ future. Top management has better insight and insider information to the growth prospects of the company, which is why insider buying is taken as a strong signal by the investor community.
This article features three such mortgage REITs that have reported recent insider buying, making me bullish on the stocks.
Diverse funding sources
Invesco Mortgage Capital Inc (NYSE:IVR) is one of the hybrid mortgage REITs because it has investments in both agency and non-agency mortgage-backed securities.
A discussion of agency and non-agency mortgage-backed securities is important because they are entirely different assets with entirely different behaviors. Agency mortgage-backed securities have the backing of government agencies like Freddie Mac. Since their principal and interest payments are guaranteed by the government, they are considered free of default or credit risk. On the other hand, non-agency don’t have the government backing and therefore are not default-free. This is exactly why they usually offer higher yields compared to agency paper. Their structure and the Fed’s involvement in the agency mortgage-backed securities markets make them behave very differently, providing the element of diversification.
Going forward, Invesco Mortgage Capital Inc (NYSE:IVR) seems to take full benefit of this diversification. Invesco Mortgage Capital Inc (NYSE:IVR)’s portfolio is constructed in such a way that it will benefit from a hike in interest rates. According to its most recent SEC filings, the company’s projected net interest income will increase 4.3% if the rates go up 50 basis points. Since the markets are already pricing in the Fed’s exit, the interest rates are on the rise. Therefore, I believe this is the time to make a move. Besides, the company has recently diversified its funding sources and added term-finance funding. This will create further benefit for the company in times of any disruption in the reposession markets.
My bullishness is also shared by the company’s top executives who have bought shares twice last week. The chief investment officer bought 2,100 shares on May 21 at an average price of $19.61. Before that, the CEO of the company bought 5,000 shares at an average price of $19.92. Remember these are not option exercises that are part of the executive compensation.
Diverse asset base
Two Harbors Investment Corp (NYSE:TWO) is another hybrid mortgage REIT with a diversified investment portfolio.The company invests in mortgage-backed securities to earn yields, while it also has investments in real estate from which it earns rental income. It reported that its projected net interest income would increase 6.6% if the rates go up 50 basis points.
Looking at the prevailing interest-rate environment, where the rates have started climbing, the insiders have started purchasing the company’s stocks. Five directors of the company have been reported to buy over 36,000 shares of the company at an average price of $11.56 per share during the month of May. Keep in mind the company’s stock is currently trading at $11.49 per share, which means this could be an entry point for you.
Higher interest rates
Annaly Capital Management, Inc. (NYSE:NLY) happens to be the largest pure-play mortgage REIT that invests exclusively in long-term fixed-rate residential mortgage-backed securities. The company suffered a lot at the hands of the Fed’s easing as its portfolio was designed for an environment where the interest rate will increase. Now, when the rates have started climbing up, you can expect the company to perform better than its peers. It also reports that its projected net interest income would go up by 17% if the rates go up 50 basis points.
Looking at this, the company’s top executives have started adding to their stake. During the month of May, one director and the CEO added 125,000 shares together at an average price of around $13.60. Remember, these purchases are not part of the executive compensation.
Conclusion
While the markets have started pricing in the Fed’s exit, there are only a few mortgage RIETs that will completely benefit from the exit. These REITs have positioned their portfolios to benefit from a rising-interest-rate environment. This is exactly why their top management teams are also busy increasing their stakes. Therefore, I recommend investors don’t wait until the Fed announces a halt in the easing programs to buy the aforementioned stocks.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Why Insiders Are Bullish on These High-Yielding Stocks? originally appeared on Fool.com and is written by Adnan Khan.
Adnan 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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