A Look at Annaly

09/12/2003 12:00 am EST

Focus:

Michael Norman

Publisher, Economic Contrarian Update

Annaly Mortgage is real estate investment trust that manages a portfolio of mortgage-backed securities. The stock dropped sharply in recent trading after announcing a reduction in its dividend. Nevertheless, two leading advisors-- Mike Norman and Tobin Smith --view the price weakness as an opportunity. Here are their comments.

"The  dip in interest rates caused mortgage applications to jump 22% according to the Mortgage Bankers Association; at the same time, refinancings surged 45%," notes Mike Norman, editor of The Economic Contrarian. "One opportunity looks to be Annaly Mortgage (NLY NYSE). The company halved its dividend and that is causing the stock to drop sharply. Given the strong mortgage data, I think it is an opportune time to load up on a stock like Annaly. Moreover, cutting dividends means that a larger portion of retained earnings are left undistributed, leaving more money for investment, acquisitions, etc. We also note that Annaly's yield is still very attractive, even with the reduction."

Adds Tobin Smith, editor ofChangeWave Investing,  "We're getting an opportunity here with Annaly Mortgage. The company reiterated previous comments about second-quarter earnings and the stock was punished as traders reacted to the surge in mortgage prepayments and lower revenues. Annaly Chairman Michael Farrell said that the prepayment trend is hurting earnings but they expect the trend to slow going forward and earnings to rebound. We agree. We are adding the stock to our income portfolio with the expectation that this prepayment trend will only have a short term affect on NLY's dividend and that once the storm is through we would get the dividend back to normal levels. The sell-off is probably our last chance to get a great buy on NLY. Take advantage of the $2.40 annual dividend that will bounce back in 2004 as new assets are put to work and spreads between short-term rates and mortgage securities once again expand."

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