How Will Chimera Handle the Carnage in 2012?

As 2011 draws to a close, it's worth it to take a peek at our investments to see what's working and what's not.

That's what we aim to do today, as we pull out the instant replay and consider the year that was at Chimera Investment (NYS: CIM) .

A few Foolish facts about Chimera

2011 Return


Price-to-Earnings Multiple


Price-to-Book Multiple


Dividend Yield


1-Year Earnings-per-Share growth


1-Year Book-Value-per-Share Growth


Sources: Yahoo! Finance and S&P Capital IQ.

Why Chimera is different from other REITs
Residential mortgage REITs like Chimera have hit a bonanza over the past few years, as ultra-low interest rates have juiced their yields. The thing you need to remember about Chimera is that it follows a different business model than most other residential mortgage REITs. By taking more flexibility with the assets it buys, it can take advantage of opportunities presented by market panics like the one coming out of Europe right now. It compensates for this higher level of risk by using less leverage.

You can get a decent sense of how risky a mortgage REIT portfolio is by looking at what proportion of its mortgage-backed securities are guaranteed by government agencies. Generally speaking, the lower the number, the riskier and more creative management is being in its portfolio selection.


Agency Securities as Percentage of Total Mortgage-Backed Securities




2.9 times

Invesco (NYS: IVR)


7.3 times

Annaly Capital (NYS: NLY)


7.2 times

American Capital Agency (NAS: AGNC)


9.5 times

Armour Residential (NYS: ARR)


11.1 times

Source: S&P Capital IQ as of most recent quarterly data.

American Capital pretty habitually stays away from non-agency securities, Annaly Capital recently shifted to an exclusive focus on agency-backed securities, while Armour is required to do so by charter. Of these REITs, only Chimera and Invesco own non-agency mortgage-backed securities at all. Invesco's current focus is much more centered on commercial mortgage-backed securities than Chimera, though.

In 2011, Chimera prepared for carnage by maintaining its low leverage stance and avoiding some of the riskier types of leverage. The goal was to help Chimera avoid some of the losses that have crushed other financials and to ensure that it has enough dry powder to take advantage of whatever opportunities present themselves in 2012. One obvious group of distressed sellers Chimera will be looking to in the new year is European banks. With its fairly open-ended mandate, Chimera will have much more latitude than the other REITs when it comes to snapping up assets.

Chimera is also looking into reentering jumbo prime securitization. In a recent conference call, CEO Matthew Lambiase noted that today's mortgages are of much higher quality than he's seen in a long time. And Fannie and Freddie's decision to reduce the maximum loan balance they're willing to guarantee has created an opportunity for companies like Chimera to get back into the securitization game. The company has some experience in the area -- Chimera underwrote and securitized $750 million of jumbo prime mortgages in 2007 and early 2008, which Lambiase said went on to perform well.

Steady as she goes
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.

I think Chimera could see some good places to invest in the New Year, but our analysts have selected a different stock that they believe is poised for tremendous growth in 2012. Find out which company in our new free report: "The Motley Fool's Top Stock for 2012." Thousands have already requested access and it'll only be available for a limited time. Simply click here -- it's free.

At the time thisarticle 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.

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