I talked about insider trading last week, laying out how I use it to find value stocks. But we can also use the insiders screen to help solve one of the most difficult question facing investors today.
We already know that the stock of companies with recent open-market purchases by the top two executives have a strong tendency to go up substantially over the next year. We can now screen for companies that have shown this type of positive activity from insiders and also provide a high dividend yield.
Mortgage REITs have been under pressure all year as investors have dumped the shares due to fears of rising rates and tightening spreads have plagued the group. Many of them have seen their asset value decline and been forced to cut dividends as a result of adverse action on the mortgage-backed securities market. But several top executives at these REITs have expressed their belief in their funds over the past few months, spending a large amount of cash to buy shares of their mortgage REIT.
Shares of AG Mortgage Investment Trust (MITT) are down more than 25% so far this year, but CEO David Roberts thinks the REIT will turn the corner sometime soon. He just spend more than $1.1 million to buy shares in the firm after dropping $800,000 back in August buying shares at a slightly higher price. The firm is advised by a subsidiary of Angelo Gordon, the large distressed securities, real estate and private-equity firm.
The shares trade at around the book value as of the end of the third quarter and yield 15.5%. I might not bet the farm on this one, but the insider buying and relationship with Angelo Gordon make me very comfortable with the idea of establishing a small position in this mREIT.
Annaly Capital (NLY) is one of the leaders in the mortgage REIT sector, and the stock has not been spared the pummeling seen in this group. So far in 2013 the shares have fallen by more than 25% … but insiders seem to think that better times are ahead.
CEO Wellington Denahan has been an enthusiastic buyer of the stock in the past month, spending more than $2.8 million in the open market to buy shares. President and Director Keven Keyes has also spent more than $1 million buying stock in the beleaguered mortgage REIT. James Fortescue, the chief operating officer, also bought more than $250,000 worth of stock in the open market during November.
The shares trade at 80% of the quarter-end book value and yield 13.8% at the current price. If the insider, are right about the turnaround, income investors could do very well with a position in this mREIT as well.
Insiders are not infallible, but they do have a strong record over the years. They tend to be early — so investors might want to scale into their purchases of these high-yielding securities. But history would indicate that we should do very well holding these in a long-term income portfolio.
At the time of publication, Melvin was long NLY.