Chimera: Buy, Sell, or Hold?

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Like many REIT investors, Chimera (NYS: CIM) shareholders aren't exactly satisfied with what happened to their stock in 2011. Even including dividends, they're now 28% in the hole.

But the past is the past, and short-term price movements tell us nothing about where a stock will go in the future. So, is Chimera a buy, a sell, or a hold today?

What you need to know about Chimera
The first thing you need to know is that Chimera follows a different model than most other residential mortgage REITs. Whereas Annaly (NYS: NLY) , American Capital Agency (NAS: AGNC) , and Armour Residential (NYS: ARR) use lots of leverage to buy safe Fannie- and Freddie-guaranteed loans, Chimera (and to a lesser extent Invesco (NYS: IVR) ) use less leverage to purchase riskier, higher-yielding assets.

These days, investors have apparently soured on that model:

Company

Percentage of Agency Securities

Price-to-Book

Chimera41%                 0.89
Invesco71%0.91
Annaly Capital100%1.02
Armour Residential100%1.04                         
American Capital Agency100%1.08

Source: S&P Capital IQ.

With the trouble brewing in financial markets these days, plus the fact that more than 80% of Chimera's assets are junk or unrated, you can see why investors are a bit skittish. All of the companies above recorded gains on asset sales in their most recently reported quarters, ranging from $6 million for Armour to $177 million for American Capital Agency, while Chimera reported a $41 million loss.

That being said, there are some advantages to Chimera's position. The big one is that it's able to take advantage of market mispricings. Whereas each of the other REITs' fate will largely be determined by interest rates and prepayment speeds, Chimera has a greater ability to place idiosyncratic bets.

Of course, flexibility cuts both ways. It amplifies the importance of Chimera's management team -- for better or for worse.

The management behind the curtain
So how can we tell if Chimera's investing style is more likely to be beneficial? To paraphrase Warren Buffett, we want to see properly incented and competent management.

Chimera CEO Matthew Lambiase owns $1.5 million of his company. Although the shares were given to him in the form of a restricted stock award by the company, it's actually a pretty significant sum in relation to his salary. (He also owns $600,000 worth of Annaly Capital, which manages Chimera.)

It's not easy to tell how talented Chimera's management is. That's the nature of Wall Street; it's tough to separate skill from luck, and we don't exactly have a long company history to go by. That being said, what we do know is that Annaly's management has done quite well through various markets over the past few decades, and Chimera's team has their confidence.

The most important thing
How Chimera fares in 2012 -- more than any other REIT above -- will depend on how well its management team is able to take advantage of new investment opportunities and manage risk. The trouble brewing in financial markets and the jumbo market could present some attractive bargains for this opportunistic REIT.

Trading at a discount to book value, Chimera could be a buy, but only if you believe in the team leading it. If you're looking for other great dividend stocks with much simpler, perhaps safer, business models, check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy so you can discover everything you need to know about these 11 generous dividend payers -- simply click here.

At the time this article was published Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Annaly Capital Management and Chimera Investment. Motley Fool newsletter services have recommended buying 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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