My #1 Pick Among Red-Hot U.S. Mortgage REITs

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
Markets spent the better part of the week drifting lower in anticipation of the Federal Open Market Committee (FOMC) meeting results. However, all the major indexes “made up for lost time” on Friday to close the week on a winning note. The Dow Jones Industrial Average gained just 0.16%, while the NASDAQ Composite and S&P 500 Index rose 0.33% and 0.36%, respectively. Emerging markets fared better as the MSCI Emerging Markets Index (EEM) added 1.01%.
 
Your Bull Market Alert portfolio ended the week nearly flat, with most positions moving just one to two percent. 3D Systems Corp. (DDD) gained 2.48% and Novo Nordisk A/S (NVO) added 1.57%. All positions remain BUYs.
 
High yielding U.S. mortgage Real Estate Investment Trusts (REITs) have been among the market’s top performers in 2012.
 
This week’s Bull Market Alert recommendation is a bet on the red-hot U.S. REIT sector through American Capital Agency Corp. (AGNC) Boasting an eye-popping 14.1% yield, AGNC is already a recommendation in my Dividend Pro trading service. 
 
AGNC invests in residential mortgage pass-through securities and collateralized mortgage obligations. The principal and interest payments are guaranteed by government-sponsored entities, or by the U.S. government agencies Fannie Mae and Freddie Mac. 
 
And thanks to Fed policy, the good times for REITs are set to continue for the next few years. 
 
Let me explain why…
 
Last month, the Fed announced it would prolong “Operation Twist” through the end of the year, selling $267 billion of shorter-term securities and buying the same amount of longer-term debt, in a bid to reduce borrowing costs and to spur the economy.
 
Why does this matter to REITs?
 
REITs borrow on the short end of the curve (say, 0.25%) and lend money on the long end of the curve (say, 1.6%). REITs make money on this “spread.” They then leverage this trade up 5x or even 10x times to multiply their profits. These profits then are paid out to you in the form of a high dividend — producing an annual yield of over 14% in the case of AGNC.
 
If the Fed intentionally keeps interest rates low on the longer end of the yield curve, it makes it more difficult for REITs to make money. A narrower spread is clearly less profitable for REITs.
 
But the good news is that the Fed also re-committed to its ZIRP (zero interest rate policy) through at least late 2014. So, some kind of “spread” is set to remain.
 
Right now, REITs still have a spread of about 1.35% to "play" with. And, REITs also have the opportunity to increase their profits by increasing their leverage — though this increases their risk, as well.
 
The bottom line? Between a continued interest rate spread and the improving fundamentals of the U.S. real estate market, I continue to believe that U.S. mortgage REITs are among possibly the very best of investment opportunities available to investors anywhere in the world.
 
Within the universe of REITs, AGNC’s stock has been one of the strongest performers in the already strong REIT sector, hitting a new 52-week high almost every month.
 
So buy American Capital Agency Corp. (AGNC) at market today, and place your stop at $31.90. For potentially even bigger upside, I recommend the December $37 call options (AGNC121222C00037000).

Portfolio Update

Bank of Ireland (IRE) ended the week nearly flat, losing just 0.87%. Standard & Poor’s Rating Services affirmed its ‘BBB+’ long-term rating and ‘A-2’ short-term credit ratings for Ireland last week. The rating agency also highlighted Ireland’s continued commitment to stabilize their financial system and estimated a reduction of their budget deficit to 3% of gross domestic product (GDP) by 2015.IRE is scheduled to report earnings on Aug 10 and is a BUY.
 
National Bank of Greece SA (NBG) closed the week unchanged. Greek lawmakers will finalize 11.5 billion euro worth of budget cuts this month in an effort to close budgetary shortfalls further. NBG is a BUY.
 
Novo Nordisk A/S (NVO) added 1.57% last week. The consensus of 30 analysts covering NVO hold an “Overweight” rating for the stock and predict a $1.44 earnings per share gain when NVO reports earnings on Aug 9. NVO is a BUY.
 
3D Systems Corp. (DDD) gained 2.48%. 3D Systems announced an innovative new application last Tuesday for its 3D Cube® printer — Cubify ® toy robots. DDD will offer sales of their robotic toys at just $4.99 each, which are printable at home in an array of colors and styles. Cubify robot parts resemble the iconic Lego® components, and can be taken apart and reassembled in many different configurations. DDD is a BUY.
 
Standard Pacific Corp. (SPF) dipped 1.66%. SPF announced plans Tuesday to offer an additional 12.5 million shares of common stock, along with a boost in its offering of 20-year convertible senior notes to $220 million. The proceeds of these offerings will allow SPF to purchase additional land and accelerate the development of new homes. SPF is a BUY.
 
Ross Stores Inc. (ROST) added 1.28% over the past five trading days. The retail landscape appears strong as consumers gear up for their back-to-school purchasing. A Thomson Reuters study revealed their July same-store sales index of 20 retailers gained 4.3%. This was triple the analysts’ consensus estimate for this index. ROST is scheduled to report earnings on Aug 16 and is a BUY.
 
ProShares Ultra Nasdaq Biotechnology (BIB) lost 8.11% last week. BIB had a slow start its first week in your portfolio as it pulled back from a recent 52-week high. However, BIB held the 50-day moving average and turned upwards at the end of the week. BIB is a BUY.
 
 

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