Is This Fund Manager Telling Us American Capital Agency Is About To Pop?


In their most recent SEC filing, David Einhorn's Greenlight Capital announced a new stake in American Capital Agency of more than five million shares.

This is a significant development simply because Einhorn turned out to be absolutely right when he went bearish of the entire REIT sector about two years ago.

Could this mean the worst is in the past for the mREIT sector?

Why American Capital Agency?
One of the main reasons Einhorn may like American Capital Agency is its management, who has shown they are willing to think outside the box to create value for shareholders.

First, its management is willing to adapt to whatever happens in order to create value for shareholders. After the mortgage REITs had been on a downward spiral in 2013, the management decided to make some savvy moves.

They decided to make some investments in their peers, in order to further diversify their assets and take advantage of the low valuations throughout the sector, and so far this has paid off tremendously. American Capital Agency's $400 million of investments, including a large chunk of Hatteras Financial Corp, has already produced about $50 million in profit including dividends and share price appreciation.

Also, American Capital Agency took advantage of the bad times and made one of the smartest investments they could.

Instead of increasing its leverage ratio by buying more mortgage assets, or de-leveraging and waiting out the rough times, the company started to aggressively buy back its own shares. At discounts of up to 25% off book value, it definitely seems like a good use of capital.

After all, if your brokerage gave you the opportunity to add to your current positions for 25% less than the current share price, wouldn't you do it?

In all, American Capital Agency bought back 10% of its total outstanding shares in 2013, and looking at the valuation of the company's shares throughout 2013, it seems like a no-brainer.

AGNC Price to Book Value Chart

Interest rates may be favorable for a while
Another reason Einhorn might feel comfortable jumping into the mREIT sector is the recent stabilization of interest rates.

Rates spiked in 2013 due to uncertainty in the Federal Reserve's intentions regarding the "taper" and possible rising rates. However, the taper did finally happen and the Fed has made clear their intentions to keep rates low for a considerable amount of time, even if the economy recovers to where the Fed wants it.

Stable interest rates mean stable and predictable spreads, which is where the mREITs make their money. If the mREITs are less worried about interest rate spikes, they can better predict the income they'll make from their investments and will be more willing to leverage their portfolios to take advantage.

Could the mortgage REITs be ready to pop?
It is definitely a good sign that the dividend cuts in the mREIT sector seem to be over.

For American Capital Agency, the most recent quarter represents the first time the dividend was held constant in more than a year. Book value rose for the first time since 2012, not just because of stabilizing interest rates, but by the smart moves made during the bad times.

Last time Einhorn called the REIT sector expensive, share prices peaked a few months later, then tumbled for the next year or so.

Since he just bought in to American Capital Agency, maybe the opposite is about to happen.

Is this an even better investment than mortgage REITs?
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