Anworth: Book value bargain?

by Jason Clark & John Buckingham, editors The Prudent Speculator

The mortgage REIT space has been under pressure since the Fed announced that it was implementing its third round of quantitative easing. Anworth Mortgage (ANH) was not an exception, with the stock falling some 20% since its mid-September high of almost $7.

Not only did the Fed actions hurt the company and its pure-play competitors, concerns over changes in rules and regulations, potential adjustments to the tax code, the Fiscal Cliff, the impact of lower long-term rates and a creeping Libor rate have taken their short-term toll.

Anworth primarily focuses on U.S. mortgage-backed securities issued or guaranteed by an agency of the United States (Ginnie Mae) or a U.S. government-sponsored entity (Fannie Mae or Freddie Mac).

We are still comfortable with ANH at this time and believe the sell-off has been overdone, leaving Anworth trading at less than 80% of its book value per share.

We like the firm’s relatively conservative management style and the fact that the current investment portfolio is made up of almost 75% adjustable rate mortgages (which would/will prove helpful in a rising rate environment).

Although we haven’t been wild about the recent dividend decreases, we note that the yield remains north of 10%.

While historically we have not spent a lot of time speaking to company management, we did have the chance to have a quick chat with Anworth’s Chairman and CEO Lloyd McAdams.

While Mr. McAdams did not make excuses, he agreed with our take that numerous non-controllable outside forces are impacting the space and ANH.

Additionally, he offered up the thought that he believes there are three types of investors in ANH shares: institutional investors (especially hedge funds), individual investors looking for yield, and value investors like us.

Numerous institutional investors are finding it much easier to use publicly traded shares of Anworth and other mortgage REITS to execute tactical positions based on their forecast for future long-term rates versus utilizing traditional credit instruments.

Not only can an investor sell mortgage REIT shares if their thesis leads them to that conclusion, they can also short them.

Mr. McAdams, while not speaking negatively about this group of investors, seemed to believe that these folks add volatility to the name and are much more short-term oriented that the yield and value seekers.

While short-term institutional investors may have played a part in the recent drop in shares, they could help push ANH shares higher when there is belief that interest rates are ready to rise.

We continue to like ANH for the potential total return the shares offer our portfolios as we collect the attractive yield and patiently await (yet closely monitor) a move back toward the historical norm of a level close to book value.

Learn more about this financial newsletter at The Prudent Speculator.

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