Forget the fact that J&J has increased its dividend in 51 consecutive years, or that its cash flow is about as steady as they come in the health care sector. The real news here is that J&J is retransforming itself into a growth company once again. I believe short-sellers would be foolish to bet against that move.
Don’t overthink this
Nearly anything related to the housing market has been a great investment since the March 2009 lows. It’s certainly been a bumpy ride, but historically low lending rates combined with very accommodative Federal Reserve monetary policy have come together to create the perfect scenario for housing prices to find a foundation and for homebuilders to regain some pricing power and inventory control. However, it hasn’t been the best of times for the mortgage-REIT sector and companies like ARMOUR Residential REIT in the past quarter.
Comments recently made by Federal Reserve chairman Ben Bernanke made it clear that if U.S. economic results continue to pick up, it will begin paring back its quantitative easing program which has been pumping $85 billion into the economy on a monthly basis. This news caused interest rates to rise which has the effect of tightening net margin spreads for mREITs like ARMOUR. ARMOUR makes its profits by levering up and relying on the fact that it invests only in agency-only mortgage-backed securities (i.e., those guaranteed by the U.S. government), which means it cover its behind in case of a loan default.
To some extent, short-sellers have been justified in their pessimism given that net interest margins for agency-only mREITs have been shrinking with regularity for many quarters now. Annaly Capital Management, Inc.
(NYSE:NLY), perhaps the most popular mREIT and a competitor to ARMOUR, has seen its net interest margin sink from a peak of more than 3% to just 0.91% last quarter. The case is the same for ARMOUR, which has witnessed its net interest margin drop to just 1.35% from 2.23% in the year-ago period.
On the other hand, the Fed has been very transparent with its intentions to the leave the Fed Funds target at historically low levels through 2015. That alone should put a cap on the near-term lending rate surge and give these mREITs another two years at minimum to shine. Following a big decline over the past two months, I feel ARMOUR could offer a very intriguing buying opportunity here.
Foolish roundup
This week’s theme is all about fleeting trends versus long-term trends. A downward move in the market that boosts the VIX, aka the fear index, could result in very short-term gains for holders of the SharesVelocity Daily 2X ETN, but they’re unlikely to see any meaningful gains over the long run. For J&J and ARMOUR, longer-term catalysts do exist that, at their current prices, should make short-sellers think twice before pulling the trigger.
The article Shorts Are Piling Into These Stocks. Should You Be Worried? originally appeared on Fool.com is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson.
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