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Anything with "mortgage" in the name has
spooked investors during the past year,
usually for good reason. But which of
these institutions is paying only 1.96%
on its liabilities and raking in a yield
of 4.27% on its portfolio, all with the
support of Uncle Sam, and is yielding a
huge 17.1% to investors?
A.) Wells Fargo (WFC)
B.) Freddie Mac (FRE)
C.) Capstead Mortgage (CMO)
D.) Ameritrans Capital Corporation (AMTC)
E.) Washington Mutual (WAMUQ) |
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Published: August 26, 2009
The
correct answer is
(C.) Capstead Mortgage
Capstead is a prime example of a
well-managed company that has been
charged with guilt by association.
It exists for just one purpose: To
buy mortgage-backed bonds. Its
portfolio consists of about $7.6
billion worth of these
income-bearing securities, and
unlike most companies in the
business of selling products and
services, CMO has no inventory or
equipment.
The company operates just like a
bank: It borrows at low, short-term
rates, and invests the proceeds at
higher, long-term rates -- pocketing
the difference. But Capstead doesn't
invest in riskier, privately issued
mortgage bonds. It sticks
exclusively to debt backed by
government-sponsored entities (GSE)
like Fannie Mae and Freddie Mac.
Debt issued by these agencies has
long carried the implied backing of
Uncle Sam. That guarantee against
default suddenly became explicit
when Fannie and Freddie fell under
government control last year.
With demand for mortgage-backed
bonds on the rise thanks to the
Federal Reserve's $1.25 trillion
mortgage-backed-securities purchase
plan, prices for mortgage backed
securities have propped up, and the
fair value of Capstead's portfolio
has increased as a result.
Meanwhile, the company's core
operations are benefiting thanks to
unprecedented short-term interest
rates near zero. As an indirect
result, the company's current annual
dividend of $2.32 a share equates to
a yield of 17.1%. The Fed's vested
interest in keeping MBS yields low
and prices high means Capstead also
has a powerful ally on its side.
That's why StreetAuthority editor
Nathan Slaughter plans to add CMO to
the "Yield Doublers" Portfolio he
follows in his Half-Priced Stocks
newsletter. Nathan's goal is to
identify securities with price
appreciation potential of +100% or
more that are established, promising
companies trading at a discount to
their intrinsic net worth. In
addition to CMO, Nathan has found
nine other securities carrying
double-digit price-appreciation
potential that could give many
investors' portfolios a much-needed
boost. To learn the names of these
securities, and to learn more about
Half-Priced Stocks,
please visit this link.
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