There's been a lot of ink spilled already on the group of mortgage REITs, and that includes the Fool buying shares of quintessential mortgage real estate investment trust Annaly Capital (NYSE: NLY ) .
I haven't been keen on the idea of investing in the group, though. Why? A big part of the reason is that from a pricing perspective, the bond market has been in a very extended bull market. Here's what the mortgage market has looked like over the 30 years ending in 2010.
To oversimplify things a bit, if you buy a bond yielding 5% and the next year a similar bond yields 4%, what happens to your bond? The price goes up. So you can imagine that during a 30-year period where rates almost continually fall it's pretty difficult to screw up too badly.
And as rates fall to unbelievably low levels, it seems as if there's been a rush over the past few years to try to grab the easy money in this market. Chimera Investment (NYSE: CIM ) , American Capital Agency (Nasdaq: AGNC ) , and Hatteras Financial (NYSE: HTS ) were founded in 2007 or 2008. A cropping up of new companies in an industry can sometimes signal conditions that are too good to last.
I don't necessarily think that these are terrible companies or are badly managed. But they're cyclical companies, and it seems to me that we could be near the peak of what's been a very long cycle.
Fallen from grace
On the other side of the cyclical picture is the group of dry bulk shippers. Prior to the financial crisis, the group was on fire as China was feeding its seemingly insatiable demand for all sorts of commodities. By mid-2008, the Baltic Dry Index -- an index that tracks shipping prices -- had easily soared past 10,000. Dry bulk shippers were killing it, and the group was on the tip of many investors' tongues.
Then the wheels completely fell off. More capacity, slowing demand, and financing difficulties -- among other problems -- knocked the BDI to well below 1,000 by late 2008. It has bounced up somewhat from there, but nowhere near its highs (it closed at 1,562 on Friday).
Not surprisingly, the stocks in the industry have been clobbered and most now trade at steep discounts to their tangible book value.
|DryShips (Nasdaq: DRYS )||0.49|
|Diana Shipping (NYSE: DSX )||0.87|
|Eagle Bulk (Nasdaq: EGLE )||0.37|
Source: Capital IQ, a Standard & Poor's company.
To be sure, it's not without reason that investors are discounting the ship assets at these companies -- ship prices have fallen, so the assets aren't worth as much on the resale market. And of course the BDI could fall further, and the industry's outlook could dim further. Plus, most of these companies carry heavy debt loads.
But which of the two industry groups am I looking into right now? The drybulk carriers. For the most part, I prefer investing in companies that don't depend heavily on cyclical factors -- think prices for steel, computer memory, or hogs. But if I'm going to poke around a cyclical industry, it's going to be one that's currently out of favor.
I imagine there are plenty of investors that think I'm silly (if not crazy) for not considering the mortgage REITs and plenty more that think it inadvisable to even be sniffing around dry bulkers. However, I've found that those kinds of reactions are often a sign that I'm onto something.
Want to join me and start keeping an eye on the dry bulk stocks? Add them to your Foolish watchlist!