AGNC Upgraded to Outperform - Analyst Blog
08 Juni 2012 - 6:04PM
Zacks
We have recently upgraded the long-term recommendation for
American Capital Agency Corp. (AGNC), a real
estate investment trust (REIT), from Neutral to Outperform
primarily driven by its healthy first quarter 2012 results and
strong growth perspectives.
American Capital Agency focuses on investments in mortgage
pass-through securities and collateralized mortgage obligations
(CMOs). The company purchases single-family residential
pass-through securities which are interests in pooled loans of
principal and interest including pre-paid principal that are made
to the holders of the notes.
Collateralized mortgage obligations consist of multiple classes
with payments of principal and interest being made to note holders
based on the maturity date of the class of security.
The mortgages underlying these agency securities are fixed rate,
adjustable rate or hybrid (fixed and adjustable) securities. Agency
securities differ from traditional fixed-income investments as
principal and interest are paid on a regular schedule and there is
a possibility that principal will be pre-paid by mortgage holders
if interest rates fall.
American Capital Agency invests only in fixed-rate agency
securities where payments are guaranteed by the U.S. government or
government-owned entities, such as Fannie Mae (FNMA), Freddie Mac
(FHLMC) and Ginnie Mae (GNMA). Specifically, American Capital
Agency invests in FHLMC Gold certificates, FNMA certificates, and
GNMA certificates.
We like the company’s focused investment approach, which is not
distracted by originations, servicing, or credit risk from
investments in mortgages that do not have the backing of the U.S.
government.
With the government takeover of FNMA and FHLMC, American Capital
Agency’s securities now have an explicit government guarantee,
which makes it a much more attractive prospect for investors.
Additionally, the company’s portfolio of government-backed assets
is relatively liquid and credit risk is limited.
American Capital Agency borrows against its investment portfolio
pursuant to a master repurchase agreement which provides short-term
financing, typically 30-90 days. The company makes a profit and
pays dividends from net interest income, which is the difference
between interest earned on investments and its cost of
borrowing.
American Capital Agency also purchases payer "swaptions" to
protect against lower interest rates that might lead to early
prepayment of mortgages. This measure ultimately facilitates the
company to continue making money by collecting premiums and ensures
a steady revenue stream.
However, the residential mortgage market in the U.S. has
experienced defaults, credit losses and liquidity concerns in the
recent past, which have reduced financial industry capital, leading
to reduced liquidity for some institutions. These factors have
impacted investor perception of the risk associated with real
estate related assets, including agency securities and other
high-quality RMBS (residential mortgage backed securities) assets.
As a result, values for RMBS assets, including some agency
securities and other AAA-rated RMBS assets, have experienced a
certain amount of volatility. Increased volatility and
deterioration in the broader residential mortgage and RMBS markets
may adversely affect the performance of American Capital Agency in
the future.
We presently have a Zacks #1 Rank for American Capital Agency,
which translates into a short-term Strong Buy rating. However, we
have a Neutral recommendation and a Zacks #3 Rank (short-term Hold
rating) for Anworth Mortgage Asset Corporation
(ANH), one of the competitors of American Capital Agency.
AMER CAP AGENCY (AGNC): Free Stock Analysis Report
ANWORTH MTGE (ANH): Free Stock Analysis Report
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