Annaly Capital Management, Inc. (NLY)

danteps (94.21) Submitted: 1/10/2009 5:03:15 PM : Start Price: $13.70 NLY Score: +4.31

There is an old saying . . .

The more complex the poker game -- the more it advantages the experts.

Consider the following:

NLY gives you the opportunity to invest in a leveraged portfolio of MBS that might be underpriced in the market. Their borrowing costs have dropped substantially in recent months whilst the credit quality of their MBS portfolio has increased due to actions taken by the US Treasury. I view the credit quality of their portfolio as being that of callable treasuries and not of traditional Agency MBS. I don’t believe the market is pricing the portfolio risk appropriately. Furthermore, the Company for tax purposes is a REIT, but holds a basket of assets that is quite different from other REITs. However, NLY is viewed generally by the market as a REIT, which allows for a buying opportunity at these levels. One should note that given the lumping of NLY with other REITs, the vicissitudes of the market may move the share price up and down with a less than desired correlation with NLY fundamentals.

A new buyer -- the most credible buyer in the entire world (The Fed) has said that they will buy about 10% of the exact asset class that NLY owns in the next few months. Because they managed their leverage and risk exposure correctly, NLY now has a substantial opportunity to lever up their portfolio in an environment where their risk parameters have dropped substantially.

There are some other factors...

1. The mortgage space is out of favor currently and poorly understood by many – unfortunately some of these folks include those in the mortgage industry

2. NLY management’s track record conveys an understanding of market dynamics over a long period of time and market conditions. Management’s decision making has historically limited portfolio & capital risk. My confidence in the management team is a leading rational for making an investment in NLY and I believe a competitive advantage for the Company

3. Investors have upside exposure to a sector of the mortgage market that has been totally decimated and will recover some day: non Agency investment grade MBS (CIM)

4. There is growth potential at NLY via recent acquisitions and their FIDAC subsidiary

5. There is strong potential for dividend growth at NLY as their lever up their portfolio

6. NLY is the best in class in the mREIT sector according to sources such as Barron’s and James Grant

7. mREITs are a tax advantaged asset class

8. Company’s recent $0.50 dividend announcement validates that they are weathering the storm and poised for future growth