Whole Dollar Jinx

OK, I admit it.

I fell for the penny wise / pound foolish curse of picking a round number to buy in.  This morning ANH continued to slide down in a minitrend that got going when it went ex-dividend last week.

I sat there and confidently entered my order to buy some more stock at $6.99.  I even relented, and decided I could live with a price (including commissions) above $7, and raised my bid by a penny.

Of course, the low tick for the day was $7.01.

I think today’s leg of the decline in ANH’s stock price was caused by an SEC registration that would allow the company to issue a secondary.  I suppose that generated some selling pressure.

I even got a private message last night asking whether I thought the company would issue anti-accretive (dilutive) stock (below book value).  For now, I don’t.

If the March 31 Fed sidelining in the MBS market results in much wider spreads, I would actually be disappointed if they don’t increase leverage and issue a secondary, because that will be a great time to be a buyer.  Even selling stock at a net of 90% of current book would make sense (to me) in that kind of market.

By the way, even though the company is now committed to paying $0.28 per share for anyone who owned the stock before Christmas, the increase in MBS prices since Sep. 30 at least partially offsets that hit, which would take book value down to $7.30 a share.

I’ll go with an estimate of year-end 2009 book value between $7.40 and $7.50 and make my commitments accordingly.

The one thing I keep coming back to with ANH is their conservative management style.  With only 5:1 leverage holding a portfolio that could easily command 10:1 lending from the dealer community, they also “suffer” from having been conservative in the past.  Specifically, they hedged interest rate risk farther into the future a couple of years ago than some others did.  As a consequence, they still have some expensive fixed-rates to pay for a while to receive LIBOR in return.

Not that this is bad, but if they weren’t so robustly hedged, they would be collecting a fatter net interest spread on some parts of their portfolio today.  The nice part is that the portfolio itself continues to roll off into the purely adjustable part of the “hybrid” adjustable ARM rate schedule.

While that does mean that rates often adjust downward, the associated hedges with their high “pay fixed” components roll off at the same time the ARMs emerge from their initial fixed-rate payment period.  The net pickup on the affected piece of the portfolio is probably between 50 and 100 basis points fatter spread after reset than the hedged-out spread they collected prior to the reset.

Even if had swallowed my whole dollar pride and paid $7.01, I would still be able to look forward to 15% + cash on cash yield over the coming year, with more upside than the more levered, more richly priced peers.

The open question is whether the ANH team will be timid or bold when the opportunity comes.  I hope it’s the latter, because that could make it a great year for both dividend yield at my under $7 cost, and a run-up of a buck or two in stock price.

If that’s the case, I already know that next year I’ll be able to take care of Justice for Children again no matter what happens on the job front.

hh

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