Read on Twitter
1/ Thread on distressed asset investing. Really this should be an entire book, or at least a full chapter, but I'll try to generalize what to look for and how to feel your way through using an example. Disclosure: I trade the stuff from the examples in this thread...
2/ Starting point is a beaten down sector. For this example we look at $REM, the mortgage REIT ETF. Learn how it works: MREITs are leveraged mortgage income trusts with a tax-advantaged capital structure designed for pass-through income. Expect 90%+ of profits as dividends...
3/ The core holdings of $REM are:
$NLY (16% allocation, 15% historical yield)
$AGNC (12% allocation, 14% historical yield)
Note that there are different kinds of mortgages, some federally insured and some not. Each REIT has different specialties and different portfolios...
$NLY (16% allocation, 15% historical yield)
$AGNC (12% allocation, 14% historical yield)
Note that there are different kinds of mortgages, some federally insured and some not. Each REIT has different specialties and different portfolios...
4/ When the sector starts burning down, you will tend to see a flight to quality as pension funds and institutions dump the trash and pack into the highest quality names. $NLY / $REM ratio chart shows this very clearly, it trades at very high relative strength against the sector
5/ As a "distressed asset investor" I'm not looking to buy the relatively expensive stuff, I want to diversify smartly into the names that institutions are discarding. It is important to identify that we are in a similar scenario as described so far before we go on a buying spree
6/ Let's look at $MITT since it is on top, showing a historical yield of 45%. I want to buy small amounts, usually capped to 2-5% of my net liq for each, diversified into several of these names. If they go bankrupt, I will survive. The more you learn about each, the better...
7/ The main idea is if bankruptcy doesn't happen, the shares will over time revert back to trading in line with the sector again. Look at how badly this one has gotten smashed relative to $REM. Ratio chart of $MITT / $REM
8/ For the scenario where we are correct and this does happen, we can assume that the dividend yield will revert back to normal levels for the sector. For example if $MITT reverts back to 10% yield, the shares would have to rise more than 400% from current levels...
9/ For the scenario where they don't go bankrupt but suffer a permanent impairment on their assets, consider one where the dividend distribution permanently drops by half. It will still likely normalize near 10% yield, but at prices 200% higher from current levels instead of 400%
10/ The exit strategy here is that by the time the sector normalizes, we are in long-term capital gains time frame. We have the option to use sales proceeds to "flip" from what was junk into the higher quality names like $NLY and $AGNC and still retain almost all of the income!
11/ If our timing was too soon, we will need to rely on hedging to keep our account protected from downdrafts. Put options on the sector etf (or shorting it), or buying $VXX to protect against broader market declines can be used to obtain more shares at lower prices.
12/ An alternative exit strategy: https://twitter.com/jontait/status/1246687719000027136?s=19
