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This "No Brainer" Trade Is Still Paying an 11% Dividend YieldBy
Thursday, April 4, 2013
A few months ago, I called it "the best opportunity in a decade in this no-brainer trade."
And if you followed my advice, you're up a quick 13%.
If you didn't buy, don't worry. The opportunity hasn't passed. You haven't missed it.
Our deal today isn't quite as good as when I first wrote about it in DailyWealth. But it may be less risky now... A new uptrend is in place. And the stock is still cheap.
Now is still a great time to buy. Let me explain...
Today, I believe we still have an excellent opportunity to buy "virtual bank" Annaly Capital Management (NYSE: NLY).
My colleague Steve Sjuggerud coined the phrase "virtual bank" for companies that operate like a bank, borrowing money at a low interest rate and investing at a higher rate... but don't have a storefront. They don't have the infrastructure, employees, or overhead of a normal bank.
Annaly's main business is borrowing money and investing in government-backed mortgage bonds.
By using leverage, the company is able to turn this into big profits. The company then pays those profits to shareholders as dividends. Annaly pays an 11.3% dividend, as I write. That's a huge dividend, but it isn't the only reason I'm interested today...
You see, it's relatively easy to see what Annaly is worth. The simplest way to do it is to use the company's book value as a rough measure of liquidation value. (You can do that with financial companies like Annaly. It's not perfect, but it's close enough.)
Anytime we can buy Annaly shares at or below book value, it's a good deal. Last fall, our opportunity was the best in a decade. Take a look...
.png) As you can see, last November, we were able to buy Annaly shares at a 13% discount to book value. It wasn't easy to stomach buying back then. The stock market had fallen. And Annaly shares were down 17% in just two months. But anyone who bought made a killing... they're up 13% in just four months.
Even if you didn't buy last fall, you still have a great opportunity right now...
As the chart shows, Annaly trades for book value today. Based on history, we want to own this stock any time we can buy at or below book value. Simply buying Annaly when it's at or below book value – and holding for 12 months – leads to average gains of 38%. That's huge.
And importantly, with the recent move higher, we now have a solid uptrend in place. That means that buying today is much lower risk than it was in November. Of course, there is some risk in buying Annaly shares... Because the company makes money based on the interest rate spread, it's vulnerable to rising short-term interest rates. Specifically, if the Federal Reserve raises short-term interest rates, Annaly's share price will fall.
But that's actually pretty unlikely...
You see, the Fed has already told us that rates will stay low at least through 2014. And that we won't see a rate hike until unemployment falls below 6.5% or until inflation returns. Based on the Fed's own estimates, we won't get there until 2015.
In my eyes, we have at least two more years to safely own Annaly. And that means at least two years of safe, 11.3% dividends.
Last fall was a great opportunity to buy into this idea. I hope you followed my advice. But if you didn't, you haven't missed it.
Shares of Annaly are still one of the best income opportunities around today. Get on board if you haven't already.
Good investing,
Brett Eversole
Further Reading:
In November, Brett explained why Annaly was "one of the best opportunities to buy we've ever seen." Learn more – and see why he predicted a safe, 50%-plus return by the end of 2014 – here: The Best Opportunity in a Decade in This No-Brainer Trade.
And learn about the power of "virtual banks" – and get one of Steve Sjuggerud's favorite names – here: Sixteen-Percent Dividends... from Residential Real Estate? Yes!
Market NotesTHIS MONEY MANAGEMENT BUSINESS IS TAKING A BEATING How out of favor is investing in natural resources? Enough to knock 56% off the share price of U.S. Global Investors (NASDAQ: GROW)...
In June 2011, we noted the downside breakout in a major natural resource fund (XME) and said it was time to stay cautious toward "cyclical" assets like the XME. Since our warning, mining shares large and small have been clobbered… Sentiment is now terrible toward mining and resource stocks.
To get a visual on this idea, we present the past two years' trading in U.S. Global Investors. U.S. Global is a money manager that focuses on natural resources. If sentiment toward natural resources is bad or good, you'll see it reflected in U.S. Global's share price.
Today's chart shows an ugly reflection. U.S. Global's share price has fallen more than 50% in the past year. Just yesterday, the stock struck a new 52-week low. Fellow resource-focused money manager Sprott Inc. has taken a similar beating. The contrarian in us is getting interested in this beaten-up sector...
– Brian Hunt
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