Buy Now: Mortgage REITs or Dry Bulk Carriers?

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.

Company Price-to-Tangible-Book Value
Excel Maritime 0.24
DryShips (Nasdaq: DRYS  ) 0.49
Diana Shipping (NYSE: DSX  ) 0.87
Eagle Bulk (Nasdaq: EGLE  ) 0.37
Genco Shipping 0.38

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!

The Fool owns shares of Annaly Capital Management. 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.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

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 March 14, 2011, at 4:36 PM, DividendDude wrote:

    When it comes to mortgage REITs, it is important to look at the interest rate spread. The chart in this article for the 30-yr Conventional Home Mortgage rate is a part of this spread. But one rate cannot define a spread. It's almost obvious that these rates have reached their lows and are likely to rise going forward. This increases ther spread and is very bullish for mortgage REITs. We will look back on this 5-yr period and wonder why EVERYONE didn't join in on the easy money for the rather brief period it was available.

  • Report this Comment On March 14, 2011, at 5:06 PM, cheap2chuck wrote:

    The shipping sector should get a boost from the unfortunate situation in Japan. Somehow I think Japan is going to need a lot of everything for quite some time to come.

    I have modestly added to my position in the Dry Bulk sector.

  • Report this Comment On March 14, 2011, at 10:07 PM, dmtcb wrote:

    in the coming months..japan will need everything!! materials ..dry goods..parts and components..windows and doors!! etc..to rebuild..!! and it will all have to shipped.. in 2009 china was "built"...so now japan will have to be "rebuilt"...so..LETS SHIP!!!

    i am a getting a strong postion on EGLE ..

    NOW!

  • Report this Comment On March 14, 2011, at 11:12 PM, Emperor2 wrote:

    You must think we fools are idiots. We can enjoy the tremendous dividends we have received for years and sell once the market changes. We do not have to buy and hold forever. Personally, I'd rather take the money and run.

  • Report this Comment On March 15, 2011, at 10:43 AM, feigmo wrote:

    I think you are the lesser fool when it comes to REITs.

    I , the greater fool, am convinced that any significant drop in share price will be the Fed upping rates. So , I set "Stop Loss Limit" on each of my MBS positions , sit back and enjoy the 10 to 17 percent dividends.

    Bottom line is that a REIT is an EARNER , and not an APPRECIATOR.

  • Report this Comment On March 15, 2011, at 11:50 PM, yaiwolf wrote:

    I own REITs... wouldn't be a buyer now.

    To early for DRY BULKS.. way too much capacity on the water.

  • Report this Comment On March 16, 2011, at 12:16 PM, scm68gt wrote:

    Quite frankly, I have owned these shipping guys in the past - when they paid dividends. However, contrary to what your web-page says - and which I find extremely misleading, none of them have paid a dividend since 2008. When they are healthy enough to pay dividends again, and you report them accurately, I think they may be a valuable part of my portfolio.

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