American Capital Agency's CEO Is Buying. Should You?


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 , 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


Return on Investment


Estimated 5-Year EPS Growth


Dividend and Yield



Malon Wilkus, CEO

Total Purchased


Average Purchase Price


Recent Price


CAPS Rating



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 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.

Getting your juices flowing
Of course, what most investors like about mREITs is their dividend. American Capital's dividend yields almost 16%, pretty much leading the industry, while Annaly's is just under 12%, similar to what Chimera Investment offers. Others like ARMOUR Residential REIT are also on the high side at 14.5%, and though Capstead Mortgage's yield is under 10%, it's still a juicy payout in comparison to other dividend paying stocks.

Yet chasing yield is a dangerous pursuit because investors must also determine whether the dividend is sustainable. REITs that took on increasing amounts of leverage to juice their returns suddenly had to preserve capital, and some like Annaly and Chimera Investment, were forced to cut their dividends, sometimes several times.

AGNC Dividend Chart
AGNC Dividend Chart

AGNC Dividend data by YCharts.

All-American choice
Because of its historically conservative operation, Annaly has often been the preferred choice of investors, but American Capital Agency has proven itself capable of navigating the churning waters. Even with its stock moving off the lows it hit late last year as industry conditions improved, I'm inclined to agree with CEO Wilkus that there's additional room for growth in this particular mortgage REIT.

I've rated American Capital to outperform the broad indexes on Motley Fool CAPS as the CAPScall holds me accountable for my opinions here, but tell me in the comments section below if you agree this mREIT will continue riding higher.

On the inside track
Annaly Capital Management has a history of paying huge dividends to shareholders. But there are some crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of the company's strategy. Click here now to claim your copy.

The article American Capital Agency's CEO Is Buying. Should You? originally appeared on

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns 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 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.