Time for the REITs again? Check out Annaly Capital (NLY) and Western Asset Mortgage Capital (WMC..
Discussed in this article: Western Asset Mortgage Capital ( $WMC )
I want to look at Western Asset Mortgage ( NYSE:WMC ) this is a mortgage REIT which, as a group has been like the bad red headed step children of the market for a while because of rising short term-rates which kind of spoils their “quote” arbitrage, whatever you want to call it.
This stock sports a 22 percent dividend yield. Now I don’t know whether that can be maintained or not, anybody smarter than me would probably say, “There’s no way it can be maintained.” Still, what’s happened to the stock? Well this is a recent IPO, the stock just printed in new all-time low, when? Yesterday, and it reversed big-time. From a volume standpoint, yesterday’s volume, a little bit above average, not nearly as big as this one where the stock gapped down, massive volume, and then just kept falling.
I’m looking at this as a trade right now. I think the bad news has been priced in, in a big way, and now this is a stock, that in my view is pretty safe to buy. Scale in slowly because look, we’ve seen these oversold bounces before and then we get a new low. So right now the low is 16.37, that is really your total downside risk on this stock, which from a percentage standpoint is kind of big, it’s about 9 percent. The reason that’s troublesome to me is, you can see the stock trickle down, you take 9 or 10 percent loss and you decide, “You know what? I’ve got to cap my losses here, I can’t just keep riding this thing down.” and then you go ahead and sell the stock. The stock drifts lower, about another five cents or so, and then runs up without you. So that’s a little problematic, but the way you get around that is to take a smaller initial position than you might normally take. Just know that you’re not catching a falling knife. What you’re doing is grabbing the handle of a falling knife that you believe has hit the butcher block yesterday, the handle still is quivering a little bit.
So that’s how I would trade Western Asset Mortgage Corporation ( NYSE:WMC ); or another one is to just buy Annaly ( NYSE:NLY ), either one really works. These guys don’t have the dividend yield that the other one does, but they’re the best-managed company in the business, in that industry. Are you really going to laugh at a 12.9 percent yield? I wouldn’t, I would be chuckling while I’m and taking that to the bank.