Over the last five years, we’ve seen record investments in housing, bundled mortgage securities, and an alphabet soup of highly-leveraged debt products (CDOs, LDOs, etc.). In late 2007, the greatest fool bought at the very top. . . and then Wall Street started selling and the house of cards fell.
There was one company that was created to profit from these debt products. But as luck would have it, this company went public at the peak of the carnival.
The good news: they banked a lot of money with their IPO. The bad news: their business model was untenable.
The name of the company is Chimera (CIM: NYSE), a Mortgage Real Estate Investment Trust (MREIT). Its purpose in life is to borrow short-term at under 1% and invest long-term in real estate debt products at more than 4%.
As you can see by the current yield curve, this is highly possible:
Source: Bloomberg (http://www.bloomberg.com/markets/rates/index.html)
The idea behind this strategy is you can leverage up your current assets by borrowing, and then later investing that money into safe and secure mortgages.
The bad news that characterized 2008 was that the credit market was frozen and CIM couldn’t borrow. At the same time, real estate debt products were losing value faster than a brand new Dodge.
Chimera was stuck — and thus, punished by Wall Street. Take a look:
Not only were mortgage debt products turning into toxic assets and credit hard to come by, but the company also decided to dilute shareholders by issuing more shares and raising more money.
In the second quarter of 2009, CIM completed a third and fourth round of public and private offerings. It raised $1.4 billion dollars. There is nothing shareholders hate more than seeing their equity destroyed.
But their misfortune is your gain. . .
CIM used this money and invested in debt products at the bottom of the market. The risk is limited because most of these debts are now backed by the U.S. government, as Freddie and Fannie are de facto wards of the state.
Mortgage REITS are obligated by law to pay out 90% of their gains in the form of dividends, and CIM just raised their dividend. According to Business Wire:
The Board of Directors of Chimera Investment Corporation (NYSE:CIM) declared the third quarter 2009 common stock cash dividend of $0.12 per common share. This dividend is payable October 30, 2009 to common shareholders of record on October 1, 2009. The ex-dividend date is September 29, 2009.
That puts their dividend at 12% — a nice return by anyone’s standards.
And now, you also have a real shot of seeing the share price return to previous highs, as the dividend continues to go up over the next three quarters.
I say three quarters because the Fed must keep short-term rates low to save the housing market. And it is unlikely they will raise rates until the summer of 2010 (at the earliest), when inflation becomes obvious.
Insiders in CIM seem to think the same way — they recently bought 150 thousand shares. Institutions have bought 378 million shares. You can see the volume picking up on the chart and the December $5 call options (CIMLA) have 28,959 open contracts. . . seems to me like a high number for a $4 stock.
I’m thinking someone knows something.
Earnings are due during the second half of November. They should reflect the leveraged (6 to 10 times) investment of that $1.4 billion dollars acquired during the second quarter and invested in discounted mortgage debt.
One way to profit from this stock is to buy those December $5 calls at $0.15 and sell them into earnings. The second way to profit is to buy and hold for the next three quarters and make money on the dividend, as well as the share price appreciation.
Plan on selling if the chart breaks the trend line to the downside — or if the yield curve flattens out.
P.S. If you’re looking for more high-yielding dividends in the MREITs space, Annaly Capital Management inc. (NLY: NYSE) has a dividend yield of 16.6%. Anworth Mortgage Asset Corp. (NYSE: ANH) pays out 15.9%. Capstead Mortgage Corp. (NYSE: CMO) 15.9% has a yield. And MFA Financial Inc. (NYSE: MFA) will give 12.9% for a dividend. I’ll continue to keep you informed in Wealth Daily in the weeks to come.
P.P.S. Earning giant-sized gains is as easy as subscribing to The Wealth Advisory. Bull market or bear market, my colleague Steve Christ has a nose for money. In fact, Steve has closed out 34 winners for just 13 losers. . . earning 600% net gains over the last 18 months.
Here a just a few of them:
- Orexigen Therapuetic (OREX)—closed for an 81% gain
- General Cable Corp(BGC)— closed for a 32.8% gain
- W.R. Grace(GRA)-closed for a 99% gain
- USEC Inc.(USEC)—closed for a 59% gain
- Shaw Group (SGR)—closed for an 81% gain