Mortgage REITs Plunged: What You Need to Know


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Wondering what Congress's failure to raise the debt ceiling means to you? Wonder no more, dear Fool. If you're a shareholder of mortgage REITs Annaly Capital (NYS: NLY) , Invesco Mortgage (NYS: IVR) , or Chimera Investment (NYS: CIM) , the answer just got painfully obvious.

So what: Shares of each of these companies dropped by 10% and more in early Friday trading, as panic flooded the market over a near-doubling (to 20 basis points) of overnight "repo" financing for government-backed mortgage securities.

Now what: Polled by Bloomberg for comments, most of these companies pooh-poohed the news, pronouncing it "just an equity market event" and "honestly not ... a big event." And with shares recovering to lose just a couple percent in most cases, it seems investors agree.

Are they whistling past the graveyard? Perhaps. But valuations like we're seeing in the mortgage REIT industry suggest it may be a good risk. Right now, Chimera and Invesco shares trade hands for less than five times earnings apiece. Industry darling Annaly, meanwhile, costs a mere 6.7 times earnings. Meanwhile, the stocks pay dividend yields ranging anywhere from 15% all the way up to 19%!

Foolish takeaway: If the U.S. government can just be convinced to postpone default by a few more years, these dividend-rich stocks will quickly pay for themselves.

Mr. Market's getting fearful. Are you feeling greedy?Add these stocks to your personal Fool Watchlist, and try before you buy.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above, but The Motley Fool owns shares of Chimera Investment and Annaly Capital Management. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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