NLY

Breaking: Markets in Free Fall

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By Brian Nelson, CFA I was up late last night watching the 10-year Treasury fall below 2%, crude oil drop below $28 (and now below $27) per barrel, and the Dow futures collapse more than 500 points. Asset correlations are going to 1 — so much for modern portfolio theory, right? The benefits of diversification are sometimes absent at the very time you need them the most. If market observers didn’t learn this during the Great Depression, certainly they must have learned it during the Financial Crisis of 2008-2009. That’s why we like cash so much at times. We have a 35%+ cash weighting in both newsletter portfolios. The Dow Jones Industrial Average (DIA) is now down ~400 points (-2.5%), … Read more

The Markets Swoon Again

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The broader US markets (SPY) swooned again January 7 as fears of a slowdown in China (FXI), or worse, a dislocation in Asia’s currency markets, and ongoing concerns about the sustainability of some of the most leveraged “players” in the energy complex took the spotlight again. None of this should be surprising. As we’ve done many a time before with the mortgage REITs, namely American Capital (AGNC) and Annaly (NLY), SeaDrill (SDRL) and the latest with Kinder Morgan (KMI), our members are far ahead of developments. That’s our job – we’re not reporters. We strive to get the right information to our members before it becomes “information,” and using the newsletter portfolios as an indication of our views on capital … Read more

Are You Still Trying to Catch Lightning with American Capital Agency?

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Investors familiar with the mortgage REIT space that have spent any time on our website know of our groundbreaking call on the industry. Please have a look here. American Capital Agency (AGNC), one of the most prominent operators in the mortgage REIT space, reported yet another disappointing quarter. It continues to be painful to write how much we don’t like the uncertainties regarding the broader mortgage REIT environment. Some of the more bullish research shops appear to finally be throwing in the towel. Though the yields on some of the mortgage REIT equities appear attractive, the risks of further dividend cuts continue to grow. Shares of American Capital currently yield ~13%, for example. In the third quarter, American Capital Agency … Read more

Dividend Cushion Ratio Predicts Two More Cuts

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Forward-looking, cash-flow based dividend analysis has proven its worth once again. Chesapeake Energy (CHK) recently suspended its dividend, and Hi-Crush Partners (HCLP) has significantly cut its dividend. In each case, the Dividend Cushion ratio appropriately warned members. Early in July and prior to the elimination of its dividend, Chesapeake Energy ranked near the top of our list of dividend yields to avoid. Based on its Dividend Cushion ratio of -7.7, we rated its dividend safety as VERY POOR, and its dividend growth potential rating was also VERY POOR. The firm updated its financial strategy July 21 and eliminated its common stock dividend, effective in the third quarter of 2015. A reduction in investable capital due to the weak commodity price … Read more

Third Quarter Earnings Season Pushes Forward

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The equity markets continue to propel higher despite what we would describe to be a mixed third-quarter earnings season. Let’s walk through a number of earnings reports from popular companies reporting so far this week. Some of them we include in the newsletter portfolios. Others we don’t. But all are worth keeping tabs on. Annaly (NLY) Annaly is a mortgage REIT (mREIT) with principal business objective to generate net income for distribution to shareholders. Being critical of the mREIT business is certainly unpopular, and we understand that many retirees generate vital income streams from such investments. Bulls and bears, however, both benefit from our independent voice, and we call out risks as we see them. Annaly and American Capital Agency … Read more

American Capital Agency’s Book Value Declines…Again

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The success of mortgage REITs in the past has largely been the result of an unhedged (unprotected) portfolio completely exposed to the vicissitudes of interest rates. Mortgage market dynamics are inherently difficult to predict, and most mortgage REITs can only bolster economic returns as measured through gross ROEs via adding additional leverage. Spread income has always been a less-material driver to book value than other comprehensive losses, or when unrealized losses on a mortgage REIT’s investments are marked to market. Very few analysts have the ability to effectively analyze these complex instruments, and while we’ve been correct about the risks related to their investment opportunities, we continue to believe it is borderline irresponsible for financial advisors to be using mortgage … Read more

Beware of Groupthink: American Capital, Annaly and now Seadrill

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“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” – Mark Twain The investment research publishing business is a brutal one, and we know you know it. The very best of calls are the ones that go against the crowd and provide such a unique and fresh insight that readers have a difficult time grasping such a variant viewpoint. Once the call is published, the peanut gallery goes to work…and boy do they go to work. Biased and mostly uninformed commenters with stakes in the game do everything they can to try to discredit the author, from personal insults on the message boards to focusing on a minute part of the research … Read more

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

Realty Income Still One of Our Favorite Dividend-Focused REITs

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On February 13, the real estate investment trust (REIT) that has a 45-year track record of providing dependable monthly income from real estate reported solid operating results for the fourth quarter of 2013. The ‘Monthly Dividend Company’ has paid an impressive 522 dividends and registered an enviable 74 total dividend increases since 1994. Though we note that the past is only as important as it informs the future, we think the future remains bright for Realty Income. Image Source: Realty Income  The Dividend Growth portfolio holding’s revenue and adjusted funds from operations (AFFO) were both impacted by acquisitive activity (its purchase of American Realty Capital Trust in January 2013), advancing significantly from the same period a year ago. We were … Read more

Tweeting on Thursday

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Thursday was jam-packed with news. Let’s jump to an abbreviated ‘Valuentum Take’ on each major news item in the spirit of Twitter’s (TWTR) 140 character limit. We don’t intend to do this too frequently, but we wanted to get our take out there in a timely fashion. We’re available for any questions. Tweeting on Thursday AK Steel $AKS issues strong outlook, but #steel industry far from attractive, among the worst in our coverage. Tibco $TIBX issues poor outlook, while Red Hat $RHT exceeds expectations, puts up strong billings growth; both firms fairly valued. Linn Energy $LINE back on track as SEC endorsement improves sentiment; we prefer $KMP and $ETP in DG portfolio. Darden $DRI to part with Red Lobster; core … Read more