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$XCO - Exco Resources: This Oversold Oil Small Cap Could Be Poised To Surge In January
Dec 12 2013, 14:20 | 9 comments | about: XCO
http://seekingalpha.com/article/1895541-exco-resources-this-oversold-oil-small-cap-could-be-poised-to-surge-in-january
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Buying depressed stocks at this time of year can lead to big gains in January, because once tax-loss selling ends, the unrelenting selling pressure can change dramatically. It is not unusual to see gains of 20% and even more in beaten-down stocks in what is known as a "January Effect Rally." I recently wrote about two cheap tech stocks that could be poised for significant gains and worth buying now, due to the coming end of tax-loss selling pressure and even a potential short-covering rally. However, there are some oil stocks that could also be worth averaging into now for a January Effect Rally. Here is one to consider now:
Exco Resources, Inc. (XCO) is an oil and natural gas company, based in Texas. It has projects in Texas, Louisiana, the Permian Basin, and other areas. This company has a number of positives going for it, but it has disappointed investors with recent financial results. This has caused the stock to drop from nearly $9 in August, to around $5. That is a big decline, which has probably made this stock a favorite for investors to sell for tax-loss reasons. However, when that selling pressure ends in late December, this stock could rebound sharply, especially since it has potential for a short covering rally.
Exco reported third quarter 2013 adjusted earnings of 4 cents per share. This excluded one-time items such as gains from asset sales and other non-cash gains and it was below analyst expectations of 10 cents per share. Results were lower due to production declines, increased capital expenditure and an impairment loss on a joint venture. However, there were some positives which include $165.3 million in revenues for the quarter which was a 16.7% gain (year over year) due to higher natural gas prices. During the third quarter last year Exco sold natural gas for $2.69 per thousand cubic feet and thanks to rising prices, it realized $3.17 per thousand cubic feet. Natural gas was nearly 94% of the total production for this company and that is why this stock could have significant upside potential, if natural gas prices continue to rise.
As mentioned above, Exco shares were trending up and trading for nearly $9, after the company announced that it would buy producing and undeveloped oil and gas assets in the Eagle Ford and Haynesville shale formations from subsidiaries of Chesapeake Energy Corporation (CHK). This deal will allow the company to significantly increase its production of oil and it gives it access to the high potential that the Eagle Ford and Haynesville regions offer. While the investor euphoria over this deal has clearly subsided, there is still a lot of future development potential that investors can buy into now for a lot less. A recent article by the "Hidden Value Investor" which is titled "Exco Resources Could Be Sitting In The Buda Sweet Spot," details why the acquisition made by Exco could be more valuable than many investors realize.
(click to enlarge)
As the chart above shows, Exco shares are oversold and now trading for nearly half of the 52-week high. According to Shortsqueeze.com, about 29 million Exco shares are short and this represents nearly 22% of the float. Many shorts have profited from the recent decline in this stock and from the continued tax-loss selling pressure. However, when that pressure ends in December, it could put shorts in a more vulnerable position. This stock appears to have stabilized at just below $5 per share and as shorts see that it is not dropping any further, many might decide to cover their positions in order to lock in profits and limit risks. If this stock is trading for just under $5 at a time when it is likely seeing a significant amount of tax-loss selling, it is reasonable to believe that once this selling pressure ends, the shares are likely to trade higher. If this stock does strengthen into January, it could spark additional gains in a short-covering rally.
It is worth noting that investment billionaire Wilbur Ross has taken a large stake in Exco Resources with about 31.5 million shares. Mr. Ross has a very strong track record of buying out-of-favor assets and stocks, which has made him one of the richest men in the world. He and many other "smart money" investors believe that natural gas prices will climb in the future as the economy recovers and as inflation kicks in. A number of other billionaires and hedge fund managers have also taken a significant stake in Exco, including names like Prem Watsa, Phil Falcone, Ken Griffin and Steve Cohen. In spite of these positives, investors should consider downside risks such as the potential for oil and gas prices to decline, as well as a substantial debt load of about $2.14 billion versus just around $33 million in cash.
With Exco shares trading at just below $5, it seems like a great time to be a contrarian and buy this cheap natural gas play for both the short-term rebound potential and the longer-term promise it holds. Exco pays a dividend of 20 cents per share, which yields about 4%. This dividend is an added bonus that will reward investors, while waiting for a higher share price.
Here are some key points for XCO:
Current share price: $4.92
The 52-week range is $4.86 to $9
Earnings estimates for 2013: 37 cents per share
Earnings estimates for 2014: 29 cents per share
Annual dividend: 20 cents per share, which yields 4%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
$FST - Forest Oil: Why This $3 Oil Stock Might Surge After December 31
Dec 14 2013, 02:05 | 13 comments | about: FST
http://seekingalpha.com/article/1898441-forest-oil-why-this-3-oil-stock-might-surge-after-december-31
Disclosure: I am long FST. (More...)
At this time of year, it makes a lot of sense to consider buying beaten-down stocks that are likely to surge in a "January Effect Rally". This is a great way to potentially generate significant gains in a short time frame, by buying cheap stocks which are oversold and experiencing tax-loss selling pressure. Stocks that are making new 52-week lows tend to attract short sellers who pile on and help push some stocks down to levels that are way below fair value. However, this is a real opportunity since there's only about two weeks left until tax-loss selling ends by December 31. When oversold stocks suddenly get some relief from this downside pressure, it can lead to strength in the stock which can then lead to a short-covering rally in the first weeks of a New Year. It's not unusual for some stocks to move 20% to 30% or even more in the first couple weeks of January.
To employ this strategy, I look for oversold stocks trading at or near 52-weeks lows and for stocks with an above-average short interest which could add more fuel to any January Effect rally. I also find that low-priced stocks make some of the biggest percentage moves upward, when tax-loss selling ends. I have done a lot of research on stocks that fit these characteristics and recently wrote about a $5 tech stock that appears poised for a potential rally in January, but also have found an oil stock that also looks very promising:
Forest Oil Corporation (FST) is an independent oil and natural gas company that was founded in 1916 and it is based in Denver, Colorado. It is focused on exploration, development and production with operations primarily in the Texas Panhandle Area, the Eagle Ford Shale in South Texas, and the East Texas / North Louisiana Area.
This stock is currently trading well below the 52-week highs of about $7.50 per share. That means it is probably seeing a significant amount of tax-loss selling pressure. Profits have come in on the low side for 2013 and some investors were also disappointed with an asset sale deal that Forest Oil announced. However, the asset sale greatly improves the balance sheet and allows the company to focus on high-potential projects as well as on liquids and oil. Furthermore, analysts expect earnings to jump from 19 cents per share in 2013, to 53 cents per share in 2014, and 65 cents in 2015. That is another reason why many investors are likely to take a second look at this stock as 2014 draws near.
Forest Oil is seeking to improve financial results in the future by divesting non-core assets and reducing exposure to natural gas. This can be achieved by increasing exposure and production on liquids and oil. Analysts at Zacks Equity Research appear to take a bullish view on these initiatives and it states:
"The company nonetheless is intent on divesting its non-core properties to boost financial strength and flexibility. We believe this will eventually allow Forest Oil to aggressively pursue growth opportunities in its plays and provide meaningful upside potential for investors."
Another positive factor is that Forest Oil has partnered with Schlumberger (SLB) on some drilling projects in the Eagle Ford and that shows the possibility of strong upside potential for these projects, and it might increase the chance of positive drilling results (due to Schlumberger's technical expertise). Forest Oil is planning to increase its drilling budget in 2014 and oil production is expected to jump from about 3,465 bopd in 2013, to around 6,800 bopd in 2014. That is almost a 100% gain in oil production which is sure to lead to higher revenues and profit margins. The higher drilling budget and move to increase oil production explains why analysts expect profits to jump to 53 cents per share in 2014 . That gives this stock a forward price to earnings ratio of less than 7 times earnings and even less (only about 5 times) when looking at analyst estimates of 65 cents for 2015.
(click to enlarge)
This stock looks cheap at current levels and as the chart shows, it is very oversold with a relative strength index of just 24. It could be poised for a significant rally into January due to the end of tax-loss selling as well as due to the potential for a short-covering rally. According to Shortsqueeze.com, nearly 20 million shares (which is equivalent to about 22% of the float), have been sold short. The shorts seem to be focused on the disappointing financial results in the past, which have been due to weak natural gas prices and not enough exposure to oil. However, the company is clearly shifting production to oil and that could be a game-changer for financial results and the share price. Another potential downside risk that must be considered is the debt load of about $1.6 billion. This has been more of a potential risk in the past, however, the company has proven it can manage this debt load and still remain profitable. Furthermore, the debt is likely to be even less of an issue as revenues and profits rise from the production increase and shift to oil. Finally, the debt load also appears to be a non-issue due to the fact that the company has additional non-core acreage that could be sold off (if needed), to pay off debt. That leaves potential downside risks like disappointing drilling results or the possibility of a major drop in oil, but with Schlumberger involved and with the global economy growing, these risks appear minimal at this time.
Historically, this company has regularly earned nearly $2 per share or more in about 6 of the past 10 years. However, it lost money in 2008, 2009 and 2012. Investors who bought when profits were down and the stock was cheap were rewarded with big gains when times were good. For example, in June 2008, this stock surged to over $76 per share. More recently, it traded for over $39 per share in January 2011. That gives investors an idea of the type of gains that have been possible in the past, when times are good. I am not expecting that, but when you consider that this stock was near $7.50 per share earlier this year, and around $4.50 as recently as December 3, the pullback down to $3.50 in just a few days seems ridiculous. Shorts also have to start to consider that the huge drop in December seems to be solely based on tax-loss selling pressure; once that ends by December 31, it is likely to be a lot more expensive to cover this stock.
Here are some key points for FST:
Current share price: $3.50
The 52 week range is $3.43 to $7.44
Earnings estimates for 2013: 19 cents per share
Earnings estimates for 2014: 53 cents per share
Annual dividend: none
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
$TNXP - 6 Doubles In A Row And 2014's Top Pick
http://seekingalpha.com/article/1896981-6-doubles-in-a-row-and-2014s-top-pick?source=email_portfolio&ifp=0
Dec 13 2013, 07:30 | 70 comments | includes: FTEK, HYGS, IMUC, MNKD, TA, TNXP
Disclosure: I am long TNXP, HYGS, MNKD, IMUC. (More...)
(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Exactly one year ago today Seeking Alpha published our first of six "Pro" articles. It has been a very successful year for the six stocks we have written about.
Each Pro article we wrote is an in-depth analysis (about 30 pages) of a stock we bought and recommended buying, and on average these stocks have gained 174% from our first recommendation. So let's see what we can learn from the 2013 "Pro" year, and look ahead to 2014.
The Results
Here are the peak and current returns for each of the six stocks:
Initial Price
Peak
Price Peak Return Current Price Current Return
Fuel Tech (FTEK) $3.59 $9.27 158% $8.72 143%
TravelCenters Of America (TA) $5.00 $12.50 150% $8.86 77%
MannKind (MNKD) $1.97 $8.70 342% $4.96 152%
Hydrogenics (HYGS) $7.70 $18.24 137% $18.24 137%
ImmunoCellular Therapeutics (IMUC) $2.15 $4.00 86% $1.10 (49%)
Tonix Pharmaceuticals (TNXP) $3.95 $10.61 169% $7.50
90%
It might be tempting to say that these stocks made gains based on initial excitement generated by the articles, but that's really not the case.
In fact, none of these stocks peaked in the 30 days that the articles were public (not including TNXP, but that article was published a week ago). And half of these stocks have made fresh highs in the last week.
Six times in a row we recommended a stock that went on to double on its own merit, within months. What did we see beforehand? Usually complexity, growth, and insider ownership.
Complexity
Understanding some stocks requires doing some self-education. Maybe complex stories are too difficult for some investors to understand, but more than that they seem so scary and time-consuming. In each of these six stocks complexity seemed to be a key to the stocks being undervalued when we found them.
Growth
In a real way, growth has never been an issue in the stock market - ever. The US economy has been fielding more and more workers for its entire history. As the baby boomers retire, that's all over, probably forever, and it is happening around the world.
For the first time ever, growth can no longer be assumed. It logically follows that growth will be valued at the highest premium ever assigned by the market, now and for the foreseeable future.
Each of these six stocks is a growth story. The market wants real growth, does not have enough of it, and will assign it a high value.
Insider Ownership
Given that we are looking at complex growth stocks, insider ownership is an excellent indicator of a good buy. The people running the business understand its complexities, and can have an excellent feel for its prospects. Insider ownership was noteworthy in these six stocks.
Fuel Tech
Fuel Tech was a prototype pick - a complex growth story with bankable insider ownership.
It took time to understand exactly what this energy/chemical technology company was selling. But with a little effort it was plain to see it had large addressable markets that could gobble up their products for years to come.
Fuel Tech's growth story seems to be playing out, it made a 52 week high in the last week, two-and-a-half times where we recommended it. Insiders were the tip-off, the CEO was a large owner, and then bought meaningfully more.
TravelCenters of America
A complex growth story. TA was complex in a different way than the other five stocks. TA was basically a lesson in reading the filings. This stock had a horrible reputation, something along the lines of the Portnoy family would never let it make money. But after looking into the complexities of the lawsuits and contracts, the story was much better than advertised. And the business was worth the wait, an aggressively expanding oligopoly with cash flows that should be secure as long as the American highway system is intact.
MannKind
Like Fuel Tech, MannKind was a complex growth story with enormous insider ownership. Understanding MannKind's technology and history was exhausting - very daunting.
That is probably why it soared to more than four times where we first recommended it.
(To be clear, we first wrote about MNKD earlier than that, but we said it could easily issue shares and per our disclosure we had not bought it. After it did indeed issue shares we bought - per our disclosure - and recommended buying it.)
MannKind was by far the largest of our six picks, exceeding $2 billion in market cap.
Hydrogenics
Complex - check. Growth - check. Insider ownership - check. Hydrogenics made a new 52 week high yesterday, about two-and-a-half times where we first recommended it.
ImmunoCellular Therapeutics
A complex growth story that moved significantly higher on its own merit. We first reccommended IMUC after it had been removed from the Russell 2000 for valuation reasons. From there at $2.15, it traded all the way to $4 in the last month.
This was for good reason. New information came out about their original ICT-107 trial. 8 of the 16 glioblastoma patients lived for a full five years, just plain miraculous.
It was very disappointing then, that the current trial reported results that were nowhere near as encouraging.
We have reviewed the released results and listened to the conference call, and along with our original research and the follow up data from the original trial, this is our summarized opinion:
This trial's data will continue to get better over time, like the original. Some patients will show a continued response, but this information will take years to play out, as with the original trial. I do not think that IMUC will have a product in the market for years, and I think that is a shame. I think that eventually IMUC will raise money and run a phase III trial in ICT-107.
We did not sell the IMUC shares we had before the news, and we have no plans to. But we think it will take a long time before IMUC recovers.
What to do? Plainly, I think that Tonix Pharmaceuticals will make up for IMUC's recent drop a number of times over.
Tonix Pharmaceuticals
We think TNXP will be the best performing stock of all.
Please read our Pro article on Tonix before it is too late! It is the only one of these six articles that is still free to read, and it goes private for non-Pro subscribers on January 1st.
Tonix is a complex growth story, and has perhaps the best insider ownership profile of any of these stocks. Tonix has more than doubled since we first recommended it, but has fallen off of its recent highs, and we think this is an entry point that everyone should take advantage of.
I won't rehash the article here (please read it now!), but in the week since the article was published there have been some bullish developments, so here are eight updates on TNXP:
1) In the Pro article we refer to TNXP as having 10 million shares. This is because we think TNXP is likely to trade much higher, and if that is the case there are a number of warrants that would be exercised. This would bring a lot of cash into the company and also bring the total share count to 10 million, up from the current count of 5 million (a meaningless number for a bull).
Part of the reason that we think TNXP traded down from about $10.50 to $8.00 is that there were almost half a million $8 warrants expiring on December 21st of this year. Up until last week it must have looked to those warrant holders that they would not get a chance to exercise them, and these warrants were almost definitely exercised in the last week. This would explain the quick dip, does not impact the share count (they were issued a year ago and already counted in the 10 million), and..
2) Tonix does not need money. They said as much twice in the most recent 10-Q, just raised what they needed in August, and if there was any question these warrants probably put about $3 million more cash in the coffers. Tonix has very significant inside ownership, and they don't want to be diluted any more than any other shareholder.
3) There are no more warrants likely to be exercised for years. There are no other warrants that expire for another four years (except for a small lot of 15,000 at $20 exercise) and it would not make sense to exercise them any time soon at any price.
4) The result of that batch of warrants is an excellent entry point for a stock that is going much higher in our opinion.
5) CEO Seth Lederman said he thinks this is a good entry point (at just under $9) several days ago, and he emphasized something we did not note in our article: Tonix went through its formative years not listed on a major exchange, and literally never had an IPO. That may sound shocking given that the former CEO of Glaxo, Alza, and JAZZ, (the list goes on) are on the board of directors, but Tonix came public through a reverse merger.
That has a lot to do with the fact that relatively no one has heard of Tonix, and why TNXP sits at a small fraction of where the market may come to value it.
6) Some patients are already done BESTFIT. Tonix has said it is aiming to release results of the 2b BESTFIT trial in October. We think this is when they will partner and realize a billion dollar market cap and $100 share price.
Things seem to be going according to plan - Tonix announced that some patients have already completed the Phase IIb BESTFIT trial.
7) We think Tonix will get a fair partner deal. In the Pro article we discuss the "Celgene contingency," and we do think that management will hold out for a fair deal. But we do not think it will be hard for management to get a fair deal. The major pharmaceutical companies are going through a patent cliff, Cymbalta and Lyrica in particular are coming off patent, and companies need to replace revenues. Tonix' management could not be better suited to making a deal, they have done exactly these kinds of deals in the past, and with the biggest players. It is management's stated preference to partner, and it would make no sense for Tonix to try to take the drug to market by itself. TNX-102 SL will be prescribed by primary care physicians, and this requires a vast sales force like Lilly or Pfizer has. Partnering makes perfect sense for everyone involved.
8) One last point that Dr. Lederman has made in the past week is that one way to compare the effect of different treatments is by using the "Cohen effect."
We have noted that in the IIa study oral cyclobenzaprine improved symptoms across the board vs. placebo. As it turns out using the Cohen scale shows the three approved drugs with a score of about 2 out of 10 (10 being the best). In Tonix' 2a trial cyclobenzaprine scored a very high 7 on the Cohen scale.
Conclusion
In our first year of Seeking Alpha "Pro" articles we have uncovered six doubles in a row. Keys have been:
Complexity keeping the story a secret
Growth being the most valuable asset, and
Insiders pointing the way
We think that Tonix Pharmaceuticals will go on to be the best performer of all, and if it is like the others it will continue to run for months. It is our top pick for 2014, and we encourage everyone to please read our TNXP Pro article while it is public!
$EROC - $NLY - These 2 Stocks With Yields Of 12% Or More Are Poised For A January Rally
Nov 28 2013, 18:17 | 8 comments | includes: EROC, NLY
http://seekingalpha.com/article/1868031-these-2-stocks-with-yields-of-12-or-more-are-poised-for-a-january-rally
Disclosure: I am long ABX, AMSC. (More...)
Editors' Note: This article covers one or more micro-cap stocks. Please be aware of the risks associated with these stocks.
This is a good time of year to accumulate cheap stocks that are probably being pressured by tax-loss selling. Many investors have strong gains in the stock market and with only a few weeks left before the end of the year, this is when stocks that have been "losers" are sold in order to offset gains in other investments. This tax-loss selling pressure often fades in the last days of December and many beaten-down stocks end up experiencing what is known as a "Santa Claus" rally. This provides an ideal buying opportunity in many stocks for investors who are willing to buy depressed names at this time.
Because of this, I am now mostly focused on buying stocks that could be poised to rally into the New Year which is now just four short weeks away. For example, I recently wrote about how the end of tax-loss selling could benefit beaten-down shares of Barrick Gold (ABX) at just over $16 and American Superconductor (AMSC) shares at just around $1.60, (which may also benefit from a settlement over $1.2 billion in legal claims), but there are also high-yielding stocks that could be poised for significant gains.
With this in mind, here are two oversold stocks (see charts below), which appear undervalued after a recent pullback, offer high yields and also could be poised for a rebound into January as tax-loss selling ends:
Eagle Rock Energy Partners, L.P. (EROC) is a master limited partnership or "MLP" that is engaged in the acquisition and operation of oil and gas properties, natural gas gathering systems, and natural gas processing plants. As an MLP, it offers tax advantages and a high yielding distribution to shareholders. A recent cut in the quarterly distribution from 22 cents to 15 cents, caused quite a pullback in the stock. This stock was trading around $7.50 in October, but it has since dropped to about $5.22 per share. However, the sell-off appears overdone and this is creating a buying opportunity for investors who seek either short-term potential gains from a rebound, or a very high yielding stock for the long term. Let's take a closer look at the company and investment potential for this stock:
(click to enlarge)
Eagle Rock has both "midstream" and "upstream" divisions. The midstream division owns natural gas gathering and processing assets in four significant natural gas producing regions which include: the Texas Panhandle, East Texas, Louisiana, South Texas and the Gulf of Mexico. The midstream division has approximately 8,134 miles of pipeline, 20 processing plants and around 787 MMcf/d of plant processing capacity. The upstream division includes long-lived, high working interest properties with development opportunities located in several regions within the United States, which include: Southern Alabama, Mid-Continent, which includes areas in Oklahoma, Arkansas, the Texas Panhandle and North Texas, and the Permian Basin which includes areas in Texas and Mississippi. These upstream properties are comprised of: 559 gross operated productive wells and 1,249 gross non-operated wells. It has proved reserves of 350 Bcfe with approximately 56% natural gas, 22% crude oil, and 22% natural gas liquids.
While the news about the cut in the distribution is a short-term negative, it is in many ways a long-term positive. Many investors and analysts believed that the company needed to cut the distribution and this could have weighed on the stock for a while, but the news is out and the company now has a far more conservative yet still generous distribution that yields around 12%. This recent distribution cut appears to reduce a major downside risk that investors have to consider, especially with high-yielding stocks. Other downside risks to consider are fluctuations in the price of oil and gas. However, Eagle Rock has hedging programs in place which reduce these types of risks.
In spite of the recent distribution cut, there are a number of positives to consider: For the third quarter in 2013, the company reported adjusted EBITDA of $62.8 million. This was an increase of approximately 12% when compared to the $55.9 million reported for the second quarter of 2013. It also reported distributable cash flow of $24.9 million, which was an increase of approximately 10%, when compared to the $22.8 million reported for the second quarter of 2013. Furthermore, the company made these positive comments in regards to the new distribution policy: "Distribution coverage was approximately 1.05x for the third quarter of 2013, and management expects coverage to increase over the next several quarters." This means that management expects the current distribution to be sustainable and that makes the recent pullback look like a buying opportunity as the yield of about 12% is still very compelling.
Another reason why this stock appears undervalued is the upside potential it may have as a takeover target. As one recent article details, there has been a wave of merger and acquisition activity in the MLP sector and Eagle Rock might be more valuable if it were to spin off or sell assets or even put the entire company up for sale. The article states:
"This presents a very compelling buyout thesis for the partnership, however. Theoretically, Eagle Rock could court multiple suitors: E&Ps for its producing assets and pipeline companies for its midstream assets. The biggest weakness in the midstream story is its fee-based revenue, but we've already seen impressive turnarounds in that arena. Consider that PVR Partners -- a recent buyout story itself -- managed to increase its fee-based revenue from 30% to 80% in just three years."
While some investors are selling this stock for tax loss reasons or just out of plain frustration, this appears to be the wrong move to make when considering analyst price targets. For example, a November 16, 2013 report from S&P analysts (which reflects the recent cut in the payout) still sets a 12-month price target of $8 per share for Eagle Rock. Consensus price target estimates are even higher at $8.85 per share. Considering that this stock is oversold, and that it appears cheap with a juicy and now sustainable yield, investors who buy now could be poised for significant capital gains in a rebound and get paid a yield of 12% while waiting for a higher share price. With this stock just around $5 now, investors could see upside of about 60% in capital gains alone if the S&P $8 target is reached.
Here are some key points for EROC:
Current share price: $5.22
The 52-week range is $5.05 to $10.52
Annual dividend: 60 cents per share which yields about 12%
Annaly Capital Management, Inc. (NLY) is a leading mortgage real estate investment trust or "mREIT". This sector has had a very difficult and volatile year due to the concerns about tapering by the Federal Reserve and due to major fluctuations in interest rates over the past several months. These issues have highlighted the downside risks in mREIT stocks and impacted financial results. As such, the company has reduced the dividend. Naturally, this has all caused the stock price to decline well below the 52-week highs of about $16. Annaly Capital shares now trade close to the 52-week low which is $10.30 and this means it is probably getting a fair amount of tax-loss selling pressure at this time of year. This could be creating an ideal buying opportunity for investors who want a stock that can provide a high yield and also has rebound potential into the New Year. In addition, there are other reasons to consider buying this beaten-down stock now:
(click to enlarge)
The recent pullback in Annaly seems to have sparked a round of bargain hunting by company insiders. On November 12, 2013, Kevin Keyes (an officer) purchased 100,000 shares at $10.43, in a transaction valued at $1,043,000. On November 11, 2013, James Fortescue (an officer) purchased 25,000 shares at $10.36 in a deal worth $258,999. On November 8, 2013, Wellington Delehan (an officer) bought 93,000 shares at $10.68, in a transaction valued at $993,248, and this follows up on a purchase of more than 180,000 shares in August for about $11 each, which totaled nearly $2 million. This shows that multiple insiders are investing millions of dollars into this stock at a time when it is trading near the lowest price in years. While many investors may have capitulated and sold this and other mortgage REIT stocks out of frustration, insiders are clearly sending a message of confidence with these significant buys. This is another reason why this stock could be poised to rebound.
Since Annaly Capital has cut the payout to more conservative levels of $1.40 per share, the current yield of about 13% looks far more sustainable. There is always the risk for another cut in the future, however, the insider buying could be a sign of confidence that management does not expect additional cuts any time soon. Other factors might also be signaling that Annaly Capital will be able to produce stable financial results in the future. For example, Janet Yellen is expected to be appointed to head the Federal Reserve and she appears poised to continue the policies that Ben Bernanke has established. That means interest rates are likely to remain at low levels for the foreseeable future and that the Federal Reserve's bond buying program will remain in place which is also good for mortgage REIT stocks. Interest rates could be the single largest risk facing mortgage REIT investors so you should believe that rates will remain somewhat stable (after a recent spike), if you invest in this sector. It is important for investors to remember that since real estate investment trusts pay a large percentage of earnings out to shareholders, any drop in earnings can result in a very quick dividend cut.
Annaly Capital paid the last quarterly dividend of 35 cents in late September, which means the next dividend should be due around the end of December. That means investors who buy Annaly Capital shares now for a potential rebound into January will also be in line for the next dividend payment. This would further reduce an investors "cost basis" and it is one more reason to consider buying Annaly Capital shares as a rebound play into January. Longer term, analysts at Wunderlich have a $12.50 price target, which is close to the book value for this stock, and Compass Point has set a $13.50 price target. Investors who buy Annaly Capital shares at the currently depressed price might be poised for a rebound when tax-loss selling ends in the coming weeks, as well as a very generous dividend yield. With the volatility seen in this stock, it makes sense to average into it over time and keep the position limited to a reasonable level in any given portfolio. This is not a stock to bet the farm on, but investors who average into a position and hold for the long-term income potential, could do quite well.
Here are some key points for NLY:
Current share price: $10.18
The 52 week range is $9.86 to $16.18
Annual dividend: $1.40 per share which yields 13.7%
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
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