Is This a Great Time to Buy NLY (Annaly Capital Management) ?

What did NOT got me interested (i.e. the usual bulls’ spew):

  • It’s cheap on a __ and __ basis.
  • Dividend yield is ___.

What got me interested:

  • Yesterday’s announced dividend cut  appears to have been less worse than the street expected (or was it?).
  • NLY shares are down ~30% in 2013 (counterpoint: down does not mean cheap, nor does down mean it can’t go down further)
  • Many of the NLY promoters from earlier this year (both the smart and not-so-smart) have been thoroughly humbled and humiliated. I love these kinds of situations (which doesn’t mean shares cannot decline further).
  • A cursory examination of the NLY historical stock price seems to show that very negative down years tend to be followed by positive years. The pattern recognition side of me tells me to BUY BUY BUY (but past patterns are not indicative of future trajectory).
  • One rarely sees a best-in-class operator (that has survived even as its competitors went out of business) shares beat up this badly, in a year’s time.

What concerns me, what needs to be better understood:

  • True Capitulation? - A bull who has been dead wrong for quite some time has not capitulated. I’d love to see him capitulate, as he seems to be long NLY for all the wrong reasons.
  • Understanding the Business, and its Economics - I would need to do a deep dive to understand the business model and its economics, especially as it pertains to macro (specifically interest rates, spreads, mortgages, housing). A friend wrote: “Agency reits are basically long interest rate risk always and can’t go to duration neutral by mandate because they don’t take on credit risk.  Correlation between mortgage rates and treasuries is strong enough for housing and credit to be more of a secondary concern.”
  • Management Quality is of Paramount Importance- Michael Farrell passed away last year. Annaly has been around forever, and its management respected the entire time. How honest and competent are the original management’s successors? How much time does the old guard have remaining? Is this your father’s NLY?

I may initiate a long today (“trade first, analyze later”). My continued analysis may be updated in this post.

2 Responses to Is This a Great Time to Buy NLY (Annaly Capital Management) ?

  1. Steven Kalter says:

    I would definitely spend more time with this name. your last bullet clearly indicates that you are new to looking at it. see this article about the death of the company’s CEO last October. Without question, he was one of the most respected guys in the mortgage industry.

    Annaly Says Michael Farrell Dies After Cancer Diagnosed
    By Justin Doom and Jody Shenn Oct 22, 2012 9:47 AM ET
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    [cid:[email protected]]Photographer: Susan Farley/The New York Times via Redux

    Michael A.J. Farrell, head of a real estate investment trust that manages mortgage assets.

    Michael A.J. Farrell, who built Annaly Capital Management Inc. (NLY) into the world’s largest mortgage real estate investment trust, has died after being diagnosed with cancer earlier this year. He was 61.

    His death was confirmed yesterday in a statement by the New York-based company, which didn’t provide additional details.

    Farrell, who graduated high school at 16 with plans to become a commercial artist, instead turned to Wall Street, beginning at E.F. Hutton & Co. in 1971. After stints at Morgan Stanley and Merrill Lynch & Co., he started Annaly in 1997 and increased assets to about $128.3 billion at the end of June, turning the firm into one of the largest buyers of home loan debt backed by the U.S. He branched out with separate companies that buy non-agency bonds and commercial real estate securities.

    “Mike will be missed not only for his stature in the business, but as one of the class guys in our industry,” said Shawn Matthews, chief executive officer of Cantor Fitzgerald & Co., the brokerage arm of Cantor Fitzgerald LP. “He hired me into this business and I have always considered him a mentor, great leader and true gentleman.”

    Farrell, Annaly’s chairman and CEO, was receiving chemotherapy for cancer that “was caught early” and was considered treatable, according to a company statement in January. In May, the firm disclosed it was in remission, while this month, it said Wellington Denahan-Norris, Annaly’s co- founder, was appointed joint CEO to allow Farrell to focus on his “ongoing treatment.”

    ‘Fantastic Leader’

    Annaly has returned more than 600 percent to shareholders since its initial public offering, outpacing the 94 percent gain for theStandard & Poor’s 500 index. Shareholders almost doubled their money in the past five years as Farrell and Denahan- Norris, 48, navigated the financial crisis and then forecast how Federal Reserve efforts to boost housing and the economy would impact bond markets.

    The two executives each earned $35 million in 2011, making them among the world’s highest-paid financial-services executives.

    “He was a fantastic leader and friend and will be greatly missed,” Annaly said in the statement. “Our hearts go out to his family and all those who were fortunate enough to know him.”

    Brooklyn Born

    Farrell was born on April 10, 1951 in Brooklyn, New York. He graduated from high school at 16, according to an article published last year in Wake Forest Magazine. He and his wife, Mary Flynn, neither of whom completed college, committed $10 million to the school in “the largest cash commitment by a living individual in the university’s history.”

    His son, Michael Edward Farrell, studied finance and economics at Winston-Salem, North Carolina-based Wake Forest University, graduating in 2010. Farrell is also survived by his wife and their children Caitlin, a 2008 graduate of College of the Holy Cross, and Taylor. In addition, he’s survived by Kelly, a daughter from his first marriage, and two grandchildren.

    Farrell’s parents, Michael John and Vera, left Europe for the U.S. after World War II, during which the elder Farrell served as a member of the Irish Guards, nearly dying in the Operation Market Garden attack in September 1944. Once in Manhattan, he waterproofed skyscrapers, painted subway cars and worked as a janitor at an elementary school before dying in 1986 at age 66, according to the magazine.

    Trading Bonds

    Farrell told the publication he wanted to be a rock star after giving up on becoming an artist. Instead he ended up trading bonds, specializing in mortgages. In 1991, while head of fixed income at Wertheim Schroder & Co., where he also hired Cantor Fitzgerald’s Matthews, he met Denahan-Norris, with whom he founded Annaly six years later.

    Farrell had concluded that REITs and mortgage bonds were a “perfect marriage between asset class and vehicle structure,” in part because they can be “buy-and-hold” investors, he said in a Bloomberg story in April. (APR) Unlike hedge funds or many mutual funds, REIT shareholders can’t withdraw money from the firms. Instead they buy and sell shares in the companies.

    Farrell stood out for his colorful conference calls and shareholder letters that discussed broader themes through historical allusions and literature such as Christopher Marlowe’s “Doctor Faustus” and the 1970 book “Future Shock” by Alvin Toffler.

    Bond Yields

    While Annaly has benefited as the Fed held short-term interest rates near zero to bolster the economy, its shares have declined 6.1 percent through Oct. 19 since the central bank said in September it would purchase an additional $40 billion of mortgage securities a month.

    That’s pushed down bond yields, narrowed spreads and reduced homeowner borrowing costs — squeezing earnings and dividends for mortgage REITs. Annaly said Oct. 16 it may repurchase up to $1.5 billion of shares over a year.

    The shares declined 0.5 percent today as of 9:42 a.m. in New York, compared with a 1 percent drop for a Bloomberg index of mortgage REITs.

    The firm’s name refers to Farrell’s ancestors in Ireland who were the reigning clan of Longford and ruled from Annaly Castle, which is incorporated in the crest of the REIT’s logo, Wake Forest Magazine reported.

    To contact the reporters on this story: Justin Doom in New York at [email protected]; Jody Shenn in New York at [email protected];

    To contact the editors responsible for this story: Alan Goldstein at [email protected]; Charles W. Stevens at [email protected]

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