Readers, Here is an article submitted to Seeking Alpha. You get to see it first. I will
post notes this week on my site of the Fed’s interest rate decision and where we should
go with this stock.
Tom
Western Asset Mortgage REIT coming into a Buy Window
Stock price likely to drop with the Feds rate hike which will signal the buy. Last week’s
582 point drop in the DOW was the beginning.
The next dividend is schedule in early January and the price should climb leading to the
ex-date.
Insider buying in December is a start to the stock price increasing.
The interest rate hike will allow REITs in increase earnings, profits and profits to
investors.
Western Asset Mortgage Capital Corp (WMC) is a Real Estate Investment Trust
(REIT) finance company focused on investing in, financing and managing Agency
residential mortgage-backed securities (RMBS) (including "to-be-announced" forward
contracts), Non-Agency RMBS and Agency and Non-Agency commercial mortgagebacked securities (CMBS). Co. is externally managed and advised by Western Asset
Management Company, an investment advisor. Co. invests primarily in Agency RMBS,
including Mortgage pass-through certificates, Agency derivatives, Agency Interest-Only
Strips, and Agency Collateralized Mortgage Obligations; Non-Agency RMBS; Agency,
Non-Agency and Non-U.S. CMBS; asset-backed securities as well as residential wholeloans.
Western Asset is a company I have followed for years and made recommendations to
buy and sell this stock using my very successful 90-day Investment Cycle. There are 5
factors that are converging to make Western Asset a smart buy for investors at this
time.
First, I have not made a recommendation on this stock for almost a year, because the
Federal Reserve Board’s constant threat to raise the interest rate has driven the price
down and the company is holding a huge hedge fund instead of investing more cash
into investments to grow the company’s earnings, profits and bottom line that returns a
bigger dividend to investors. From May 2013 when the Feds first talked of raising the
rate the stock price has dropped from $22.24 on May 2, 2013 to $10.62 on December
11, 2015. The company has paid a dividend every quarter, but the dividend has
dropped from $0.95 in April, 2013 to $0.60 in October 2015. The stock dropping and
decreasing dividend has been tugging at the stock, but we see a change coming.
1) The Federal Reserve Board is expected to raise the interest rate, which has scared
the markets way to long. Once the rate has increased, the next rate increase will be in
the distance future, and allow the markets and the economy to adjust and begin new
growth. The next rate hike is not likely until the world economies improve and the U.S.
economy can grow on its own.
2) The company’s stock price will drop with the news of the rate hike, as it has begun
with last week’s sell off of over 582 points on the DOW, and Western Assets stock price
has dropped $0.62 (down 5.5%) in just the last week. With an additional drop near the
same amount, we expect the stock to find its bottom based on the reaction to the Fed’s
move.
3) The company’s hedge fund should prevent a huge loss for the quarter, but I believe
the company is likely to reduce its hedge amount after this rate hike and invest more
into higher returning investments. It is likely to take 2 quarters to see any response
from the move, but the growth is likely in 2016 to show upward movement.
4) The company is fighting to keep the dividend from falling any more, and after fourth
quarter the earnings and profits are likely to be higher, to support a move, any move
higher would trigger a stock price surge and confidence, not only in Western Asset, but
the REITs sector and financial sector as a whole. This is likely to be the trigger for the
stocks to begin climbing toward the $20s once again.
5) Quietly with little noticed, Neumayer Elliott, who is Chief Operating Officer at Western
Asset, purchase 1,000 shares at $11.25 on Dec. 4, 2015. Although the price has
dropped since, I believe the expectations are the stock to climb in 2016.
The last ex-dividend date was on October 1, 2015, with the announcement on
September 24. We can expect the next announcement near December 23, 2015, with
the ex-dividend date near January 4, 2016 (Monday after the holiday). There is usually
just a few days of trading before the next ex-date.
This recommendation is challenging but with the anticipated drop coming from the
Federal Reserve Board’s rate hike, we are recommending a buy on the stock at or
below $9.75. We think the stock will grow leading toward its ex-date over $11 giving the
investor a return of about $1.25 per share, with a return on the investment of about
12%.
If an investor wants to hold the stock for 2016, there is an strong opportunity for the
stock price to grow near $15 per share with a higher interest rate and if the company
reduces it hedge position to free up more funds for buying investments. As we stated
above, until the world’s economies begin improving, another rate hike is in the distant
future.