Why Annaly Capital Stock is up today

What happened

Standard & Poor’s chose a mortgage investment company Annaly Capital Management (NLY 2.35%) to join its MidCap 400 index. The news is sparking renewed interest in Annaly’s stock, sending shares up as much as 6% on Tuesday morning.

So what

Annaly is a mortgage real estate investment trust (REIT), a company that invests in mortgage-backed securities. The company earns its money through principal and interest repayments as service fees, another name for the administrative task of collecting payments and managing loans.

A decade of low rates has created a difficult environment for Annaly, and stocks are down more than 60% in the past 10 years. But with the Federal Reserve indicating that it is ending its long rate-tightening cycle, investors have shown renewed interest in Annaly to benefit from higher rates in the future.

On Friday, after the markets closed, the index division of S&P Global announced that Annaly will join the S&P MidCap 400 Index. Annaly and Dynatrace will enter the index, replacing American Eagle Outfitters and Mineral Technologies.

Stocks tend to get a boost when added to an index because mutual funds that track the index are bound to add the stock to their portfolios, creating buying demand.

Now what

The inclusion of the index gives Annaly a short-term boost, but the Federal Reserve will take steps to make the long-term bullish case for the stock a reality.

The Fed, as part of its unwinding to combat rising inflation, is reducing its purchases of mortgage-backed securities, ending a policy that has created artificial tensions in the market in recent years. Analysts had expected the departure of a major buyer to put downward pressure on asset prices, although a drop in new supply due to a slowdown in mortgage applications could help offset this. pressure.

NLY price/book value. Data by YCharts.

The real problem with Annaly shares is valuation. The stock is trading today at a higher premium to its book value than at any time in the past 10 years. Historically, the stock has worked best for investors when bought at or below the book. Given the valuation, investors should be careful buying here on index inclusion.

Lou Whiteman has no position in the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.

Sallie R. Loera