Core Viewpoint - Annaly Capital Management (NLY) is a prominent player in the mortgage REIT sector, but investing in its common stock presents significant issues [1] Investment Options - Investors interested in mortgage REITs should consider preferred shares, which are suitable for both risk-averse investors and those seeking higher returns for taking on more risk [2] - Annaly Capital offers several preferred shares, with NLY-F currently near a buy rating, priced at $25.49 [2] Preferred Shares Analysis - NLY-F is approximately $0.16 above the buy rating, with a target price that accounts for call risk [3] - If Annaly calls shares of NLY-F immediately after purchase, investors could lose about $0.15 per share, although the likelihood of this happening is not 100% [3] - The dividend for NLY-F may decrease next quarter due to forecasts for the Fed Funds Rate, which influences short-term rates and dividend rates [3] Rate Expectations - If the Federal Reserve is expected to cut rates multiple times, investors may find preferred shares less attractive [4] - Conversely, if only 1 to 2 rate cuts are anticipated, preferred shares may appear more appealing [4] Financial Ratios - Annaly has a strong common equity to preferred equity liquidation ratio of 6.81, which increases to 7.31 when considering market cap [5] - This ratio indicates a solid cushion for preferred shareholders in the event of liquidation [5] Investment Strategy - Mortgage REITs, including Annaly, are not ideal for risk-averse investors due to their inherent risks and should be treated as trading securities [7] - Annaly's common shares have seen substantial price increases, leading to a perception of being overpriced [7] Market Positioning - The market cap to preferred share value ratio helps assess whether a mortgage REIT is trading above or below book value, influencing investor sentiment [8] - Annaly's preferred shares, particularly NLY-F and NLY-I, are more likely to be called due to their higher dividends compared to other preferred shares [9] Alternative Options - NLY-J is another viable option for investors, offering comparable yields but trading at a premium to its base value [10] Conclusion - Annaly's common shares have limited upside potential after a strong performance, making them less suitable for long-term holding [11] - Preferred shares are recommended for long-term positions due to their solid income and lower volatility compared to common stock [11] - NLY-F is close to a buy rating, and investors should wait for a dip into the buy range before considering purchases [12]