Technically, Annaly Capital Is a Sell

We examined Annaly Capital (NYSE: NLY  ) using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but a common interpretation is signal line crossover. Signal line crossover uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of Annaly Capital's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! While we jest, it's actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 25 times!

Here at Fool.com, we're more interested in other measures of company value. When we look at Annaly Capital and its peers, here are the areas that interest us:

Metric

Annaly Capital

Capstead Mortgage
(NYSE: CMO  )

Redwood Trust
(NYSE: RWT  )

Market Cap (billions):

$10.79

$0.84

$1.19

Qtrly Rev Growth (YOY):

N/A

(26.30%)

74.80%

Revenue (TTM, billions):

$ 1.27

$0.13

$0.11

P/E (TTM):

9.12

9.76

9.68

PEG (5-year expected):

4.24

1.6

1.96

Source: Yahoo! Finance and Capital IQ, a division of Standard and Poor's.
YOY = year over year. TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These are areas that led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at Annaly Capital, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • Annaly is simply a dividend monster right now. Last quarter the company paid out a dividend of $0.68 per share. That works out to an annualized dividend yield of 15.5%!
  • Annaly's specialty is borrowing money and reinvesting in "agency" securities like Fannie Mae. Right now, short-term borrowing costs are at extremely low rates. This allows Annaly to capture a high spread between the borrowing cost and the return it receives on its investments. Last quarter, Annaly reported "core earnings" (a non-GAAP measure the company uses to assess its business) of $336 million. As long as short-term interest rates stay low, Annaly should continue paying out extremely high dividends to its shareholders.
  • While investing in mortgage securities sounds precarious, Annaly's focus on "agency" securities backed by the U.S. government helps eliminate credit risk. Also, the company has reduced leverage from around 10:1 in 2006, to closer to 6:1 today. The company's not without its risks, but Annaly has become increasingly conservative as housing prices plummeted and the mortgage market went into chaos.

Want to sell Annaly Capital based on technical merits today? Technically, odds are that you should flip and buy Annaly Capital sometime very soon. If that sounds like madness to you, well, we here at Fool.com agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race to schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relative simple science: eliminating the vast complexities of evaluating true company value. It's an attractive theory, but one that is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with up to 75% of market trading now done by Ph. D-level programmers at massive high frequency funds, even if opportunities existed, what chance does an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to studies. There was Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier. Annaly Capital crossed the crossover 25 times across the past year! The amount of trading in most technical analysis schemes eats away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's why, at Fool.com, we recommend individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end we find that to be the best contributor to long-term wealth, and it'll spare you having to sit bleary eyed in front of a computer buying in and out of companies with a Big Gulp full of coffee. That's the kind of future we're looking for. Although, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then Annaly Capital looks like a sell right now.

Jeremy Phillips owns shares of no companies listed above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 06, 2010, at 10:55 PM, storms47 wrote:

    I bought some NLY a few weeks its a great stock especially if you have some extra money laying around with not much return. What caught my eye is the low beta .40 . It rarely reflects what the stock market is doing.

  • Report this Comment On August 09, 2010, at 10:29 AM, plange01 wrote:

    technically nly is one of the few buys on the market.

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