What happened
AGNC Investment (AGNC 0.94%) stock did a fine job of getting over the hump of Hump Day. Shares of the mortgage real estate investment trust (mREIT) closed Wednesday more than 2% higher, trouncing the marginal rise of the S&P 500 index, thanks largely to an analyst's recommendation upgrade.
So what
Well before market open that day, JPMorgan Chase's Richard Shane tagged AGNC with an overweight, in other words buy, at a price target of $12.50 per share. He previously had it pegged at neutral.
Shane's upgrade comes at a time when "headwinds from rising rates begin to abate," he said.
mREITs are highly dependent on interest rates, as they make their money on the "spread" between what they pay for their financing and what they take in from the securities in which they invest. Since the mortgage-backed securities (MBS) favored by mREITs underlie loans with very long terms, if interest rates get too high, an mREIT's profitability can be threatened.
Now what
Shane wrote that in the current environment, he believes MBS prices will rebound and benefit AGNC's fundamentals. Meanwhile, its earnings fully cover its high-yield (nearly 14%) dividend. (REITs are required to pay out at least 90% of their net profit in dividends.)
For the most part, investors have become more bullish on interest rate-sensitive stocks lately. Although inflation remains an issue, the pace of its growth has slowed lately. Investors should be cautious in this regard, however, as Federal Reserve Chairman Jerome Powell has hinted that the Fed has no immediate plans to curb its recent habit of hiking rates.
