Chimera Sees An Excellent Rally In Their Preferred Share – Maybe Time To Exit – Chimera Investment Corporation (NYSE:CIM)

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This research report was produced by The REIT Forum with assistance from Big Dog Investments.

It’s time to take your gains and walk away.

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Chimera Investment Corporation (CIM) had an opportunity in one of their preferred shares recently. We will break it down.

Taking a look at CIM.PD

In Preferred Shares Week 174 (4 weeks ago), we highlighted CIM.PD as a potential share to rally hard following recent weakness. It wasn’t near our target buying price, but we saw a high probability of a bounce. CIM.PD was $25.65 then, compared to $26.53 recently. We had an update for subscribers in our Preferred Share Week 178 article on 11/17/2019.

That’s 3.4% in just under a month. Traders in CIM.PD may want to close out for profits.

We prepared an updated version of the Yahoo price chart we used 4 weeks ago:

We presented this chart to investors after 10/18/2019. We suggested that CIM.PD should be the top performer going forward with a nice bump in the share price. What do you think? Since 10/18/2019 was CIM.PD a great performer? Its prior underperformance disappeared with a massive 4-week run.

To isolate the performance since Preferred Shares Week 174, we pulled a 4-week chart:

CIM.PD had a great run. We don’t see further “easy profits” in the trading opportunity. Isn’t 3.8% in 4 weeks enough?

We talked about the “price to last 52 weeks” value recently in an article on a preferred share from Anworth Mortgage (ANH). For CIM.PD, the value is running over 95%. Shares could continue to rally, but the deck is no longer stacked in favor of the investor. That 52-week high was set on 11/14/2019. Shares are in new (and dangerous) territory for the valuation.

CIM.PD today

So, where is CIM.PD trading at today?

Source: The REIT Forum

Chimera doesn’t have any preferred shares within our buy range. We use this chart, so investors can see our prices ranged for all the preferred shares we cover. CIM.PD is currently $1.83 over our buy range. Even though CIM.PD didn’t come into our buy range, we still had a buy rating. Why? Because we also track the price ranges for each preferred share and their closest peers. If a share routinely is within our overvalued range, we may consider buying in when shares are within our hold range (This is a rare occasion).

Diversification isn’t everything

We encourage investors to diversify among several good investments. However, diversification by itself does not protect investors from including poor investments in their portfolio. The iShares U.S. Preferred Stock ETF’s (PFF) long-term performance is hampered by the inclusion of several poor investments. Diversification reduces the impact of a single bad investment, but it doesn’t replace doing due diligence.

It isn’t worth having a “bearish” outlook on PFF, so we just remain neutral. We expect PFF to deliver mediocre returns. It could quite easily be +5% or minus -5% over the next year. Analysts don’t want to take any rating besides “neutral” if they expect returns to be flat. It reduces the average performance on their ratings, so they tend to avoid it.

That’s a bit unfortunate for investors, who may not like the prospect of taking on the risks of the ETF for relative meager returns. They could buy an ETF filled with very short-duration Treasuries and earn a moderate rate of return. However, if you wanted returns similar to a savings account or a bank CD, you wouldn’t be here. Instead, we look for bargains in the preferred share space.

How Can You Find Bargains?

The most important step is to have a grasp of the underlying fundamentals. Investors should understand the financial condition of the company. By understanding the fundamentals, you’ll have an easier time evaluating how much risk a specific share carries.

The second factor is to monitor several preferred shares to see when they are not moving in unison. Occasionally, we will see preferred shares from a single REIT deliver dramatically different returns. That can be a big deal! If you find a large change in the relative value of two preferred shares, you may have a great opportunity to swap between investments.

Final thoughts

CIM’s preferred shares are far from our buy range. We believe that investors in CIM preferred shares should consider looking for other opportunities. For buy-and-hold investors wanting to stay in CIM.PD, we don’t believe shares are overpriced until they reach around $26.34. However, investors should keep in mind that shares are close to our overpriced range. CIM preferred shares carry a risk rating of 2.5 from us making them an okay fit for the more aggressive buy-and-hold investors.

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Disclosure: I am/we are long ANH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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