In a recent post, I provided a link to a TA (Technical Analysis) service that made a bear call on amREITs. I mentioned that the TA folks don’t adjust their mathematical models for dividends, a flaw that guarantees followers of pure TA will not be comparing actual investor returns when they choose stocks to buy and stocks to sell.
I will give props to StockTwits for at least mentioning the current yields of Anworth (ANH), Annaly(NLY) and American Agency (AGNC).
They did not, however mention the relationship between the stock prices and the book values. I can understand why book values get ignored for banks with questionable assets held at par, or for tech companies or brand name behemoths whose real value is intangible and not listed as part of book value.
I guess the question really comes down to the basic difference between chart readers and balance sheet readers. Or, as a successful investor I bantered with for years now said on our internet bulletin board, the difference between his technical indicators and my “funnymentals.”
So let me put in my two cents for understanding what book value means with amREITs.
Except for a few questionable valuations for such things as management personal relations, the amREIT subsector statements of book value has been very “clean” for a very long time. After all, the prices of Fannie Mae MBS are right there to see, every day, for literally thousands of investors. They are hard to fake, in other words.
That’s why I see price targets based on several years of charts as pure piffle if the liquidation value of the portfolio is far above those targets. Too many seasoned bond investors know full well that at amREIT is just a levered bond fund, and that buying Fannie, Freddie or Ginnie MBS at a discount of 15% or more to the active liquid market value is a rare opportunity indeed.
As it turns out, the price target StockTwits named for Anworth ($5.90) is right on that 15% discount to book value level that I picked as the point at which very big, very smart money rushes into these stocks. It’s also the kind of discount that has only happened for a few days a couple of times in the past decade.
Since the article ran, Anworth, Annaly and American Agency have all traded higher, but so has the market. At the indicated yields of 15% to 20% for these stocks, holders have also been getting closer every to the next dividend, which naturally provides its own kind of price support for the stocks.
I wouldn’t be surprised, in other words, for the charts to tell us in a few weeks that the downward trend was broken, and for the TA folks to register surprise that their chart patterns targets weren’t hit. That’s what happens when you drive the race looking in the rear view mirror. You don’t see the turns up ahead.
On the other hand, we “funnymental” fans are almost always surprised when the market stops valuing these stocks based on what they will pay to investors over time.
Clearly there is room for both kinds of investors to be right part of the time, and to be wrong part of the time, and to co-exist, albeit somewhat uncomfortably.