Famed money manager Peter Lynch told us executives can sell their stock for any reason, but typically they buy only for one: They think the price is going to go up!
Today I’m highlighting mortgage REIT American Capital Agency Corp. (NASDAQ:AGNC), which saw CEO Malon Wilkus sink more than $500,000 of his own moneyinto the company’s stock the other day. Now, this wasn’t an option grant, but purchases made on the open market just like you or I would do, so we should consider whether this is a sign he really thinks the REIT is ready to jump higher.
American Capital Agency snapshot
|Market Cap||$11.0 billion|
|Revenues (TTM)||$2.1 billion|
|1-Year Stock Return||22.4%|
|Return on Investment||8.6%|
|Estimated 5-Year EPS Growth||2%|
|Dividend and Yield||$5.00/15.5%|
|Insider||Malon Wilkus, CEO|
|Average Purchase Price||$32.34|
Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn’t a call to buy, but just the inside track on a company you might want to check out further.
No longer a house of horrors
Relatively speaking, the housing industry does seem to be improving. Single-family home starts are at a four-year high, existing home sales rose in January to the second highest level in three years, home prices are inching up and allowing mortgage holders to get out from being underwater on their loans, and foreclosures have eased up, too. The industry’s not the picture of health, but it no longer looks to be on its deathbed either.
And that’s good news for the real estate investment trusts that invest in mortgages. Although they prospered initially from the housing crisis as Federal Reserve policy encouraged low-cost borrowing that allowed them to invest in higher-paying assets and pocket the difference, mREITs started sagging as the Fed tried to inject life (and money) into the system. Its quantitative easing policies artificially lowered interest rates causing prepayment of higher rate loans in exchange for lower rate ones. The narrowing spread between the two served to compress the profits the mREITs earned.
As the Fool’s Amanda Alix recently pointed out, the spread between what an mREIT like Annaly Capital Management, Inc. (NYSE:NLY) was able to borrow and what it could invest in narrowed to less than 1% this past quarter. While American Capital’s spread was somewhat healthier at 1.63%, back in 2008, it was sporting spreads north of 3%while Annaly was above 2%.
Rolling over the markets
Fortunately, the Fed is ruminating about whether it should ease up on its quantitative easing policies. While St. Louis Fed president James Bullard says the Fed is going to be “very aggressive” with its easy money ways for a “long time,” they’re at least giving it serious consideration. Mortgage rates are starting to rise again, and refinancing is expected to slow, which ought to help slow the slide in the mREIT spreads.
American Capital Agency also plans on taking advantage of various attractive opportunities as they arise, such as the TBA dollar roll market it noted on its conference call.