Bargain Hunting in the Mortgage REIT Sector

Bargain Hunting in the Mortgage REIT Sector

After getting beaten to a pulp again last Friday, mortgage REITs ticked upward on Monday, even as a mass downgrading of the sector took place by Wunderlich Securities. Though agency players Annaly Capital and American Capital Agency were able to gain back only a portion of their Friday stock price losses -- as was particularly hard-hit Armour Residential -- the upswing was a welcome, though surprising, outcome.

There was no new information on the jobs picture coming out over the weekend to explain this phenomenon, which makes me wonder: Could bargain hunters be at the heart of the mysterious rally?

Analysts at odds over mREITs
Financial analysts have been busy noting the underperformance of mREITs lately, especially since the Fed dropped the QE3 taper bombshell almost two weeks ago -- immediately igniting fears of rising interest rates, which would decrease the value of the trusts' legacy assets, thus dinging book values. The pain hasn't been limited to the stocks mentioned above, as CYS Investments , and even hybrids like Invesco , have been on a roller-coaster ride ever since.

Friday's bloodbath prompted Wunderlich to downgrade all mREITs, voicing concerns about the liquidity of mortgage REITs in general as interest rates rise. Not stopping there, the analysts noted that the sector's dividends are likely to head south, and that some mREITs may even find it impossible, at some point, to meet margin requirements related to the short-term fundiing used to buy new securities.

Their advice to investors? Bail if you can, and if you can't, stay put long enough to collect as many of those soon-to-be-obsolete dividends in order to offset your losses. In the latter case, hope fervently that the particular trusts that you have invested in don't go belly-up. Yikes.

Wunderlich's report could scarcely be more dour, but analysts at FBR Capital Markets also put their two cents in, and it is downright refreshing by comparison. The FBR crew saw the recent tossing around of mREITs as an overreaction to Friday's jobs report, and while noting that some upheaval was to be expected, felt that the whole episode was overblown. That being said, there could be some pretty sweet bargains out there.

FBR more likely to be on the money
Which report do you believe? After observing Monday's sector lift, I think FBR had it right. Bargain hunters were on the prowl, and share prices sectorwide were buoyed as a result of their shopping spree.

That's not to say there still aren't serious headwinds facing the industry. But, as Marc Courtenay noted after the dive mREITs took in late May, taper phobia has taken its toll on many good companies lately. As far as mREITs go, well-managed ones like Annaly, which has survived many ups and downs over its long life, will more than likely prevail.

As for the other, newer trusts, they will be learning valuable lessons before this economic chapter is closed. For investors, the usual watchful waiting is in order, always keeping the long-term view in mind. After all, I'm betting that it's the educated investors who are scooping up additional shares of their mREIT favorites right now, and at fire-sale prices, to boot.

With all the chatter regarding the end of the mREIT sector's powerhouse dividends, where is an income investor to turn? If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.

The article Bargain Hunting in the Mortgage REIT Sector originally appeared on

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.