Here's Why Annaly Capital Management and American Capital Agency Are Trading for a Discount to Book Value

If you think Annaly Capital Management and American Capital Agency are bargains because they're trading for a discount to book value, then I'd urge you to think again.

Jun 21, 2014 at 6:00AM

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If you were to listen to most stock analysts, you'd be excused for concluding that Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC) are some of the best bargains in the market today. The problem with this perspective, however, is that it's wrong.

The bullish storyline on these stocks is simple: Because both are currently trading for a discount to book value, they must therefore be a bargain -- for the record, Annaly trades for a 7% discount to book value while American Capital Agency's current valuation is 5% less.

But what this storyline seems to miss is that current stock prices don't reflect the present set of facts. Instead, stock prices reflect future expectations. And in this case, the expectation is that these companies' book values are likely to decline going forward.

Is this a realistic expectation? Check out the video below to see why Motley Fool senior banking specialist John Maxfield thinks it is.

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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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