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Motley Fool Issues Rare “All In” Buy Alert
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The great Peter Lynch delivered many classic quips on the subject of investing. One of my favorites can be paraphrased as, “Insiders will sell stock for a lot of reasons, but they’ll only buy it for one — they think it’s going up.” Insiders have more knowledge about their companies than just about anyone else, so even if a stock may not have appealed to you at first glance, when those in the know are buying, it can make sense to give that stock a second look.
Real estate stocks Annaly Capital Management (NLY -2.33%) and WeWork (WE -1.80%) have both been beaten down over the past few years, but now insiders are adding to their positions, and their prospects may be looking up.
As a mortgage real estate investment trust (mREIT), Annaly borrows money at low short-term rates and invests it in mortgages and mortgage-backed securities that offer higher rates. The mREIT has generated significant cash flow over the years on the spread between those rates. Moreover, because its dividend yield is usually in double-digit percentage points, it’s a popular watchlist stock among investors.
The problem is that the yield has stayed in the double-digit percentages even as the actual dividend has fallen because the stock price has, broadly speaking, followed the payouts downward.
Data by YCharts.
Annaly uses its portfolio of mortgage-backed securities to collateralize loans — borrowed money with which it buys more securities — which multiplies its exposure to interest rate risks. Not only do rising interest rates decrease the value of its existing mortgage-backed securities (the prices of bonds go down when interest rates go up), but they create a disconnect in which Annaly’s assets pay long-term fixed rates, but its liabilities charge it ever-increasing rates, thinning the spread it can earn on interest payments.
These issues are widely known, and are a big reason that Annaly stock is down 24% over the last year. Yet insiders are still buying. CEO and President David Finkelstein purchased 200,000 shares in June, boosting his stake to over 1.6 million shares.
Annaly management has been preparing for rising interest rates for a few years. The mREIT has an extensive hedging program and has established a $1.7 billion portfolio of mortgage servicing rights (which increase in value when interest rates go up). The result was an encouraging second quarter in which the mREIT was able to beat earnings estimates. Management also announced that it would not cut the dividend — which currently has an insane 14.5% forward 12-month yield.
You may have heard of WeWork from news reports or through one of the several books, podcasts, and documentaries that explored its dramatic history. You might even have watched the TV drama about it starring Jared Leto. Clearly, the story of this company and the antics of founder Adam Neumann are well known at this point. But there is more to the company than that.
Today, WeWork has 777 locations across the globe, supporting 917,000 total desks for 658,000 members. According to a recent investor presentation, the company has about 30,000 total business members, including 58% of the Fortune 100, and companies like Amazon, Netflix, and Goldman Sachs.
In addition to the coworking spaces, WeWork has established a fully integrated software platform that allows enterprises to manage hybrid work for their employees. Companies can use the platform to manage inventory, book offices, desks, or meeting rooms, and integrate it into their email and calendar programs.
The company is just starting to turn things around from its drama period. Its revenue of $2.96 billion over the last 12 months was an improvement from the $2.57 billion it made in 2021, but still below 2020 and 2019’s numbers.
There is evidence that the company has entered a new period of growth, but the market doesn’t believe it yet. The stock has been down over 65% over the last year and trades for less than 1 times sales.
And, of course, insiders are buying. CEO Sandeep Mathrani has made three purchases over the last two months totaling 98,500 shares, and CFO Andre Fernandez bought 40,000 shares in August.
Finally, WeWork doesn’t just have a legacy PR problem. It has a liability problem, too. It is one of the rare public companies that have negative equity because its current liabilities outweigh its assets.
About $16.5 billion of the company’s $22 billion total liabilities are long-term lease obligations. These give the company a form of operating leverage. WeWork has to pay the leases no matter what, so if it can increase its occupancy rate, a lot of that additional revenue will drop straight to the bottom line.
WeWork may be a binary gamble at this point. Either it will fail to make its lease payments and go under, or it will break out and be a huge winner over the next few years. Either way, the stock is a speculative bet right now, not an investment.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Mike Price has positions in Annaly Capital Management and Netflix. The Motley Fool has positions in and recommends Amazon, Goldman Sachs, and Netflix. The Motley Fool has a disclosure policy.
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