The Big Picture For The Week of April 1, 2012

The other day I was reading an article at Seeking Alpha about Annaly Capital (NLY). The author seemed to draw a negative conclusion and he got ripped pretty good in the comments. I would note that the author seemed to misread a couple of metrics and seemed to not fully understand a few others (for example traditional PE ratio isn’t terribly useful in studying a REIT).   

As a mortgage REIT, NLY takes on a lot of leverage and the job of the company is to manage leverage correctly. This takes in all manner of variables that I think bulls would concede is complicated. Obviously anyone bullish on the name would believe that the management is capable of managing those variables. 


The big draw to the name is the dividend yield which is currently around 14%–that is the trailing yield and it is important to note that it is a trailing number. Looking back Google Finance for five years it looks like it has made all of its scheduled dividend payments but the amount of each dividend has a history of big swings in both directions. Foreign companies seem to put less weight on keeping a steady dividend, they pay out on business conditions and it would appear NLY does the same which is of course logical (and required) and not a knock on the stock. 


For me the stock ticks off all of the negative buzz words; financial, mortgages, real estate, leverage, interest rate spreads so we don’t own it but in looking at the chart it has been remarkably resilient. For five years the stock is up 6.6%, plus all the dividends, while the S&P 500 is down 2% and the Financial Sector SPDR (XLF) is down 55%. 

I would also note that for the most part the ride has been much smoother than for the SPX of XLF but not 100% of the time. There was a two or three week stretch in early 2008 where it fell 28% and going back a little further it fell 40% in the second half of 2005. 

It is unlikely that I am going to buy the stock, I can’t get comfortable with the entire picture that I think I see and I tend to believe that yields that high belie some sort of risk regardless of whether I know what that risk might be but I may have been too negative on it before (although technically there is no way to know)–certainly I am surprised how well it has held up.

Reading all the comments on the above post got me to thinking about how popular the stock is. it seems like I see at least one article about it on Seeking Alpha every day. If you click through to that page you will see that many of the articles have dozens of comments, some even in the hundreds. I don’t know if there is a search function on Seeking Alpha to count comments but excluding Apple (AAPL) there can’t be too many other stocks that are this popular (as measured by number articles and number of comments). 

As noted above other than a few spasms here and there the stock has been relatively even keel as opposed to going up several hundred percent so the interest is no doubt attributable to the dividend. Still the tone of the comments seems to imply a loyalty to the stock that is uncommon and combining that with a yield that is uncomfortably high leaves me continuing to avoid the stock. Candidly I don’t understand the emotion that appears to be embedded into the loyalty but if there is an emotion tied in that is a negative for me.

The high yield might be a reason for people to be cautious but my lack of understanding of the sentiment is not a reason for anyone else to be cautious. For me this is just a head scratcher. 

As for the pictures, we got our new (to us) engine relettered to say Walker Fire and Engine 86. 

6 Comments

  1. Why 86? Surely this isn’t the 86th engine your department has owned.

    Reply
  2. each department in the area has a range of numbers for vehicles and we are the 80s.

    Reply
  3. The mREIT’s have gotten pretty hot the past couple years but your intuition is correct: These are best conceptualized as leveraged bond funds and management skill (and a bit of luck) is critical.

    I shorted this sector strongly in ’06 and ’07 but learned enough about some of the survivors to buy a couple in ’08. A few new ones have come out recently that look just as promising as NLY; i.e., I bought one a month ago after the initial offering folderol cleared up.

    It’s like anything else when looking for rational ways to augment a portfolio segment: For income yield, MLP’s, BDC’s and mREIT’s used in moderation can boost overall performance considerably, the trick as always is to avoid concentrating risk.

    Good looking truck …might save someone’s home or life one day too which makes it even prettier.

    Reply
  4. thank you RW

    It is a big hulking metal old time fire truck and we really lucked out with the condition the truck is in.

    Reply
  5. I’ll read and post an occasional tart remark on the SA site. It is for entertainment purposes.

    The fact that the author appeared to not have a grasp of some items on his Annaly agenda list is the norm, not the exception, on SeelingAlpha.

    Halftime: Louisville is somehow making a game of it.

    Reply
  6. Kentucky v Louisville? Who should root for? Does anyone care about any of the final four teams (excluding alumni of these schools.

    Reply

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The Big Picture For The Week of April 1, 2012

The other day I was reading an article at Seeking Alpha about Annaly Capital (NLY). The author seemed to draw a negative conclusion and he got ripped pretty good in the comments. I would note that the author seemed to misread a couple of metrics and seemed to not fully understand a few others (for example traditional PE ratio isn’t terribly useful in studying a REIT).   

As a mortgage REIT, NLY takes on a lot of leverage and the job of the company is to manage leverage correctly. This takes in all manner of variables that I think bulls would concede is complicated. Obviously anyone bullish on the name would believe that the management is capable of managing those variables. 


The big draw to the name is the dividend yield which is currently around 14%–that is the trailing yield and it is important to note that it is a trailing number. Looking back Google Finance for five years it looks like it has made all of its scheduled dividend payments but the amount of each dividend has a history of big swings in both directions. Foreign companies seem to put less weight on keeping a steady dividend, they pay out on business conditions and it would appear NLY does the same which is of course logical (and required) and not a knock on the stock. 


For me the stock ticks off all of the negative buzz words; financial, mortgages, real estate, leverage, interest rate spreads so we don’t own it but in looking at the chart it has been remarkably resilient. For five years the stock is up 6.6%, plus all the dividends, while the S&P 500 is down 2% and the Financial Sector SPDR (XLF) is down 55%. 

I would also note that for the most part the ride has been much smoother than for the SPX of XLF but not 100% of the time. There was a two or three week stretch in early 2008 where it fell 28% and going back a little further it fell 40% in the second half of 2005. 

It is unlikely that I am going to buy the stock, I can’t get comfortable with the entire picture that I think I see and I tend to believe that yields that high belie some sort of risk regardless of whether I know what that risk might be but I may have been too negative on it before (although technically there is no way to know)–certainly I am surprised how well it has held up.

Reading all the comments on the above post got me to thinking about how popular the stock is. it seems like I see at least one article about it on Seeking Alpha every day. If you click through to that page you will see that many of the articles have dozens of comments, some even in the hundreds. I don’t know if there is a search function on Seeking Alpha to count comments but excluding Apple (AAPL) there can’t be too many other stocks that are this popular (as measured by number articles and number of comments). 

As noted above other than a few spasms here and there the stock has been relatively even keel as opposed to going up several hundred percent so the interest is no doubt attributable to the dividend. Still the tone of the comments seems to imply a loyalty to the stock that is uncommon and combining that with a yield that is uncomfortably high leaves me continuing to avoid the stock. Candidly I don’t understand the emotion that appears to be embedded into the loyalty but if there is an emotion tied in that is a negative for me.

The high yield might be a reason for people to be cautious but my lack of understanding of the sentiment is not a reason for anyone else to be cautious. For me this is just a head scratcher. 

As for the pictures, we got our new (to us) engine relettered to say Walker Fire and Engine 86. 

Submit a Comment

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