Taking a Deeper Look at the Opportunity in Javelin Mortgage

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While the broader markets are struggling in 2014, mortgage real estate investment trusts, or mREITS, are up 5-10 percent on average. One of my favorites over the past month is Javelin Mortgage (NYSE:JMI). The stock ended 2013 approaching $14. Now it is at $14.50. That said, I think the next stop is $15 per share in first-quarter 2014.

Just what is Javelin Mortgage?

First, I will be honest and straightforward. Javelin Mortgage is a very young company that went public just more than a year ago, on October 3, 2012. The team that runs Javelin Mortgage is Armour Residential Management LLC, pursuant to a management agreement, the same name behind the popular Armour Residential REIT (NYSE:ARR).When shares began trading, about 6.5 million shares exchanged hands on day one, and the stock closed trading at $19.60 per share. It should be noted that another offering to raise cash was conducted in second-quarter 2013 — an offering of 6 million shares, bringing the total float to 13.5 million shares outstanding.

Javelin mortgage’s portfolio

Javelin Mortgage is a bit riskier but also more diversified than other companies in the mREIT space, given its hybrid nature and the fact that it doesn’t just invest in the safer agency-backed securities. Instead, Javelin Mortgage is engaged in investing primarily in hybrid adjustable-rate and fixed-rate mortgage-backed securities and mortgage loans.

Some of these securities are issued or guaranteed by a U.S. government-sponsored entity or guaranteed by the Government National Mortgage Administration, and other holdings are backed by residential and/or commercial mortgages. At the discretion of management, Javelin Mortgage may also invest in collateralized commercial mortgage-backed securities and other mortgage-related investments, including mortgage loans, mortgage-related derivatives, and mortgage servicing rights.

Stock statistics

At the time of this writing, Javelin Mortgage is trading at $14.50. Shares aren’t heavily traded, as average volume is about 340,000 shares per day. Some of the metrics that really catch my eye with Javelin Mortgage are the things I look for in finding a successful mREIT. First is book value: Javelin Mortgage’s last reported book value was $14.69 as of October 30.

On this date, the stock was trading around $12, which was a 19 percent discount to book value. While interest rates were somewhat stable in October and November, December has been a bit volatile. It is likely there will stabilization of the book value or a very slight move within 2 percent up or down. I certainly cannot see it declining over another $1 (or 7 percent) to where shares trade now.

I think that shares are absolutely trading at a discount, and in fact, for an mREIT performing this well, should trade on par with book value a 2 percent increase in book value gets me to my $15 target. Javelin Mortgage has one of the best price-to-earnings multiples out there, only trading at four times earnings. What about the dividend and yield? Javelin Mortgage pays a sustainable 12.4 percent annualized yield based on its monthly dividend of 15 cents.

What I like about Javelin Mortgage is that it pays its dividend monthly, so investors can compound their investments at a greater pace versus a quarterly distribution. I also like that Javelin Mortgage forward declares its dividends over the next three months.

Insiders have been buying

People buy stock for one reason and one reason only: They see value and want to make money. That being said, there have been insiders at Javelin Mortgage who purchased a number of shares since the selloff in the mREITs began. No one is selling. Table 1 has the details of recent insider transactions.

Table 1. Javelin Mortgage Investment Insider Trades in Last Seven Months

Insider Number of Shares Purchased Price Paid Date Purchased
Jeffrey Zimmer 5,000 $11.9119 11/26/2013
Ulm Scott 5,000 $11.9163 11/26/2013
Daniel C. Staton 5,000 $15 6/3/2013
Daniel C. Staton 1,200 $15.0758 5/29/2013
James R. Mountain 4,000 $15.29 5/29/2013
Ulm Scott 1,000 $14.9348 5/29/2013
John C. Chrystal 1,000 $14.81 5/29/2013
John C. Chrystal 500 $18.828 5/14/2013

Clearly, insiders believe the company will do well going forward. Prior to this wave of buying, there had been no insider trades since just after the stock had its initial public offering. Insider buying is usually a sign of strength, particularly when there is a wave of purchases close together when there had been none prior. Couple this with the fact that there has been no selling and we have a real bullish setup.

A sustainable dividend

Javelin Mortgage is simply outperforming most of the companies in the mREIT sector. The stock  is on its way to $15. Javelin Mortgage can afford its dividend and has not cut, like some many mREIT competitors have. In fact, Javelin Mortgage recently announced its dividend policy for all of 2014 (Table 2). Javelin Mortgage has stated that it will pay 15 cents monthly for every month in 2014, or $1.80 on an annualized basis.

I should also point out that as a REIT, in order to maintain this favorable tax status, Javelin Mortgage is required to timely distribute 90 percent of its ordinary REIT taxable income. Accordingly, Javelin Mortgage may increase the amount of one or more announced dividends before the applicable record date or may declare supplemental dividends, if necessary, to meet this tax requirement. This is indeed possible. In fairness, should the market sour, cuts are also possible.

Table 2. Javelin Mortgage’s Announced Dividend Schedule, 2014

Month Quarter Dividend Shareholder of Record Date Payment Date
January First $0.15 January 15, 2014 January 30, 2014
February First $0.15 February 14, 2014 February 27, 2014
March First $0.15 March 17, 2104 March 28, 2104
April Second $0.15 April 15, 2014 April 29, 2014
May Second $0.15 May 15, 2014 May 29, 2014
June Second $0.15 June 16, 2014 June 27, 2014
July Third $0.15 July 15, 2014 July 30, 2014
August Third $0.15 August 15, 2014 August 29, 2014
September Third $0.15 September 15, 2014 September 29, 2014
October Fourth $0.15 October 15, 2014 October 30, 2014
November Fourth $0.15 November 17, 2014 November 26, 2014
December Fourth $0.15 December 15, 2014 December 30, 2014

Conclusion

Javelin Mortgage is maintaining its dividend and pays a hefty 12.4 percent and distributes monthly. The company’s portfolio is a touch riskier than many competitors, but it’s also far more diversified. Further, there have been several insider buys, with large purchases just more than a few months ago. The stock is breaking out technically with a strong fundamental basis. Shares still trade at a discount to last reported book value. I see the stock moving above the $15 mark in February.

Disclosure: Christopher F. Davis is long Javelin Mortgage.

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