Daily Stock Pick: October 18th, 2022

Stocks rose heading into the trading session, adding to yesterday’s solid positive action. Gains were fueled by better-than-expected corporate earnings from companies including Bank of America, Target, and Johnson & Johnson. Will positive earnings results in an oversold market create the proper conditions for a market rebound? Or is it time for a reality check?  

This week we’ll get some clarity on how the housing market is holding up against record-high mortgage rates with the release of September’s housing starts, building permits, and existing home sales. The average rate on a 30-year fixed-rate mortgage surged to nearly 7% last week, its highest level in over 20 years, according to Freddie Mac. Mortgage rates have more than doubled since the start of the year when the average 30-year mortgage stood at 3.11%.

As the Fed’s hawkish monetary policy has caused short-term borrowing rates to soar, things couldn’t get much worse for mortgage REITs. However, AGNC Investment (AGNC) should benefit from higher interest rates over time. While Fed policy has raised short-term borrowing costs, it’s also providing a boost to the yields on the mortgage-backed securities that AGNC is currently stocking up on.  

The REIT boasts a robust and well-safeguarded portfolio. Based on preliminary third-quarter results from the company, it ended September with an investment portfolio totaling $61.5 billion, of which only $1.7 billion was credit-risk transfer assets. Almost the entire portfolio is composed of agency assets, which are protected by the federal government in the event of default. There’s a lot of safety built into AGNC’s supercharged 18% yield. AGNC pays its dividend monthly and has averaged double a digit yield in 12 of the past 13 years.    

The consensus has raised its EPS estimate by 12% over the past month, leading up to the company’s October 24th earnings call. The consensus expects the REIT to post quarterly earnings of $0.71 per share, representing a year-over-year decline of 5.3%. Revenues are expected to be $289.1 million, down 34.7% from the year-ago quarter.