Jefferies thinks American Capital Agency Corp. (AGNC) is fairly valued. Words like “innovative approach to risk management” makes me think of Enron and their “innovative approaches”. Likewise, words like “sophisticated hedging strategy” sounds to me like a house of cards propped up with counterparty risk. The financial health of AGNC’s unnamed hedging counterparties cannot be determined. Would you want to enter into a hedge with Lehman Brothers, AIG, or any other bankster?
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American Capital Agency's (NASDAQ: AGNC) reported 1Q11 results were $0.12 above consensus and book value grew 7% Q/Q. Despite substantial ROE outperformance and the most innovative approach to risk management in the REIT space, Jefferies views the shares as fairly valued. AGNC currently trades to a 1.15 multiple of book value, a justifiable premium to the pure-play Agency REIT average of 1.1x.
During the quarter, AGNC doubled the size of their investment portfolio. Surprising to Jefferies was the company's focus on fixed-rate product, which represented 82% of the total portfolio at quarter-end. Importantly, AGNC does not own TBA mortgages, but rather the company tends to focus on specified pools.
In 1Q11, AGNC increased its exposure not only to plain vanilla interest rate swaps, but also swaptions, synthetic I/O securities, and TBA and Treasury positions in order to increase the duration of their hedge portfolio. AGNC clearly employs the most sophisticated hedging strategy in the mortgage REIT space, Agency or non-Agency.
Jefferies has a $29 PT and Hold rating on AGNC
American Capital Agency closed Tuesday at $28.83
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