QE3 Bonanza : The Way to Play It
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
QE3 is not only meant to bring the financial system back to health, but also to kick up both domestic and commercial infrastructural spending. The Federal Reserve Bank will be buying $40 billion worth of mortgage backed securities every month, for 12 months. Additionally the Fed also announced that the interest rates would be kept low at least until 2015.
Recently Freddie Mac announced that the interest rate in a 30 year loan has dropped to 3.36% which is the lowest level since 1950’s. It is due to such low interest rates that the mortgage applications surged 16.6% last week. These numbers make it clear that REIT companies are raking in the moolah and that one should be bullish about it.
ARMOUR Residential REIT (NYSE: ARR) invests in both adjustable and fixed rate mortgage backed securities which are guaranteed by government bodies like Freddie Mac and Fannie Mae. Once the securities are on the books of ARMOUR Residential, the company uses them as collateral to raise more funds to buy more securities. It is due to this reason, that the business model is highly leveraged with debt/equity levels touching 9x. This means that a mere 11.11% drop in the value of the securities owned by ARMOUR Residential, could wipe out its entire equity, therefore risk-averse investors should strictly stay away from this stock.
Being an REIT, the company has a trailing annual dividend yield of a massive 16%. The management of the company recently announced that it would be cutting down its dividend and that now it would be yielding 14.1%, which is still massive. ARMOUR Residential pays out monthly dividends, so it’s never too late for an income investor to enter the stock. However the continued high yield could render the operations unstable, which is why risk averse investors should stay away from this one.
Additionally the Fed announced that it would be buying $85 billion worth of bonds every month. These injections of liquidity into the markets, is expected to further kick up the infrastructural spending, which will be the growth driver for REITs.
The company over a period of 3 years has been able to increase its assets from $127 million, to a huge $13.98 billion. Over a period of one year, the company’s stock has risen nearly 18%. The company shares its market space with Chimera Investments (NYSE: CIM) and Annaly Capital Management (NYSE: NLY), both of which have underperformed ARMOUR Residential in terms of annual stock returns.
|
Company |
Forward P/E |
Net Profit Margin |
EPS growth expected next yr. |
|
ARMOUR Residential |
6.75x |
48.7% |
4.6% |
|
Annaly Capital |
8.81x |
9.5% |
4.5% |
|
Chimera |
6.07x |
58% |
-4.3% |
Shares of ARMOUR Residential REIT trade at a forward P/E multiple of 6.75x, which indicates that the stock is undervalued. The company has the second best net profit margin, and analysts expect the EPS to grow at 4.6%, which is the highest amongst the peers.
ARMOUR Residential is operating in a thriving industry. The rising property prices, would increase the total asset value held onto the books of the company. The company has a good mix of financials and fundamentals, and has outperformed its peers in terms of stock returns. Due to the highly leveraged business model of the company, the stock has a Foolish Buy rating only for the risk bearing investor.
Interested in Additional Analysis?
Annaly Capital Management has a history of paying huge dividends to shareholders, made possible by borrowing at cheap short term rates and investing in longer term mortgage securities. But there are some things investors absolutely must know about Annaly’s business before buying the stock. In this brand new premium research report on the company, a Fool analyst runs through the dynamics of Annaly’s business, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
