P/E Ratio: 9
Yield: 5.2%
Annaly is a hedge fund disguised as a real estate investment trust that makes its money by investing in mortgage-backed securities. What distinguishes Annaly from its out-of-favor Wall Street peers is the fact that it doesn't take credit risk, only interest-rate risk. It buys mortgage-backed securities issued by government-sponsored enterprises like Fannie Mae and Freddie Mac; in other words, it has no exposure to subprime mortgages. What makes Annaly's business model so compelling right now is the widening gap between its borrowing costs and the yields on the mortgage securities it holds. In the third quarter, that interest-rate spread more than doubled, from 0.32% to 0.67%.
This widening spread is fueling massive earnings growth - 57% in the third quarter and a projected 53% in 2008, according to analyst estimates. It boasts a 5.2% dividend yield and trades at a mere nine times estimated 2008 earnings.
Last updated January 02 2008: 5:32 PM ET
