Is American Capital Agency Undervalued?

With shares of American Capital Agency (NASDAQ:AGNC) trading around $30.94, is AGNC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

American Capital Agency is a real estate investment trust. The company earns income primarily from investing on a leveraged basis in agency mortgage-backed securities. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities. After the real estate boom and bust that led to the 2008 Financial Crisis, mortgage and real estate influenced companies took a major hit. However, many of these companies are now recovering and are seeing impressive returns. As the real estate market seems to be seeing progress, companies like American Capital Agency and poised to see rising profits.

T = Technicals on the Stock Chart are Weak

American Capital Agency stock has seen a consistent uptrend since its initial public offering in 2008. The stock has digesting gains for several months now so a break higher or lower for the stock will dictate a strong future trend.. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, American Capital Agency is trading below its key averages which signal neutral to bearish price action in the near-term.

AGNC

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of American Capital Agency options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

American Capital Agency Options

22.07%

76%

73%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on American Capital Agency’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for American Capital Agency look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-75.94%

139.75%

-82.01%

-164.71%

Revenue Growth (Y-O-Y)

-57.82%

263.87%

-52.01%

-216.92%

Earnings Reaction

-7.37%

2.98%

2.71%

1.09%

American Capital Agency has mostly decreasing earnings and revenue figures over the last four quarters. From these figures, the markets have seen improvements in American Capital Agency’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has American Capital Agency stock done relative to its peers, Anworth Mortgage Asset (NYSE:ANH), MFA Financial (NYSE:MFA), American Capital Mortgage (NASDAQ:MTGE), and sector?

American Capital Agency

Anworth Mortgage Asset

MFA Financial

American Capital Mortgage

Sector

Year-to-Date Return

6.99%

4.84%

13.87%

3.82%

11.48%

American Capital Agency has been an average performer, year-to-date.

Conclusion

American Capital Agency is a real estate investment trust that primarily makes investments using mortgage-backed securities on government-sponsored entities. The stock has seen a consistent uptrend over the last several years and is now digesting gains from its rise in price. Earnings and revenue numbers have been decreasing but investors have seen improvement in the reports issued. Relative to its peers and sector, American Capital Agency has been an average year-to-date performer. WAIT AND SEE what American Capital Agency does in coming quarters.