Annaly Capital Management, Inc. (NLY)

Annaly is being pummelled by short sellers, probably in anticipation of the commercial mortgage blowout. What most don't realize is that NLY is the best run mortgage REIT in the business. All their mortgages are backed by the government. They have wide spreads and run a tight ship as evidenced by their performance over the last year. With a 16% dividend and a history of continued growth, it really does not get better, unless the bears drive down the price, then I will buy more.

The price for Annaly is right. The company is selling for book value and its current dividend yield is 17% based on its most recent quarterly dividend. Analysts expect Annaly to earn $3.09 per share in 2010 and $2.89 in 2011. If Annaly hits these estimates and makes cash distribution equal to 90% of earnings, then the 2010 dividend should be about $2.78 per share and the 2011 dividend should be approximately $2.60. I think downside risk is low because Annaly invests only in the highest grade mortgage backed securities. This means credit risk is close to zero. Annaly makes its money based on the spread between short term interest rates and longterm interest rates. Because the yield curve is very steep right now, Annaly is earning record returns on equity with lower than average leverage. I expect this favorable situation to continue for the foreseeable future.