Editor’s note: As of 9/20/11 Lucas Krupinski no longer manages a Covestor model
Covestor model manager Lucas Krupinski is a Florida-based registered investment advisor with a focus on trusts and estates. Regarding his investment process, Lucas says “I go through company balance sheets and income statements thoroughly, and if anything catches my interest I make determinations from there.”
For his Small Cap Fundamentals portfolio, Krupinski
seeks to generate returns through various methods, including holding long term positions, trading around short term positions and seeking exposure to investments that generate current income. Preference given to smaller cap issues, but is not constrained to any set of investments or methodologies.
Krupinski’s top holding at present is American Capital Agency Corp (NASDAQ: AGNC), which is a real estate investment trust (REIT) that earns income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations.
Philip Mause recently explained this type of investment model:
The world of real estate investment trusts (REITs) is generally divided into equity REITS (which own equity in office buildings, shopping centers, apartment buildings or other structures) and mortgage REITS (which own mortgages on real estate assets). Within the universe of mortgage REITS, investors usually distinguish between commercial mortgage REITS, which own mortgages on commercial properties, and residential mortgage REITS which own residential mortgages. Finally, some residential mortgage REITS own mortgages which are not insured by federal agencies, while agency mortgage REITS have portfolios made up largely if not exclusively of mortgages insured by federal agencies (Fannie (FNMA), Freddie (FMCC), and Ginnie). These mortgages are held in the form of mortgage backed securities guaranteed by one of the United States government agencies.
As REITs, these companies are generally not taxed on their income but are required to dividend 90% of that income to shareholders; the income is generally taxed as ordinary income to the shareholder. For this reason, REITs generally cannot expand by retaining earnings and so must periodically engage in secondary offerings. There have recently been a spate of agency mortgage REIT offerings due to the attractiveness of these securities to yield oriented investors. Sometimes these offerings have adverse effects on the price of the stocks. The 90% dividend requirement also means that the dividends of these companies will vary from quarter to quarter based on earnings and that investors will not seem to smooth, inexorable, but slow increase in dividends that a JNJ or KO seems to be able to generate. Often, one of these stocks will take a hit based upon a drop in the quarterly dividend.
Of course, the big advantage is the yield. Based on recent data, stocks in this sector have yields between 12 and 19% and, thus, are candidates for inclusion in IRA and other tax sheltered accounts.
Mike Maher at Seeking Alpha recently discussed the specific opportunity at AGNC:
While shareholders should never like being diluted, it makes sense for AGNC to keep issuing shares to expand its holdings of securities given that shares trade at a premium to book value, which was last reported being $24.24 on February 8th. The fact that shares continue to march higher, even with the dilution, is a testament to the strength of the company’s management American Capital (ACAS), and the 19% yield. If you purchased shares on the September offering at $26, you will have received one $1.40 dividend already, and will be due the next $1.40 dividend April 27th. That amounts to $2.80 in dividends, as well as about $2.50 in stock appreciation, depending on where the new offering prices, for a total return of $5.30, or 21.5%.
AGNC’s yield is reported as over 19% by Google Finance (as of 3/30/11).
Sources:
“Dividend Investor Boot Camp: ABCs of Agency Mortgage REITs” Philip Mause. Seeking Alpha, 3/22/11. https://seekingalpha.com/article/259415-dividend-investor-boot-camp-abcs-of-agency-mortgage-reits
“American Capital Agency’s Secondary (And High Yield) Provide Opportunity” Mike Maher. Seeking Alpha, 3/22/11. https://seekingalpha.com/article/259419-american-capital-agency-s-secondary-and-high-yield-provide-opportunity
