A WACky income play: Walter Investment Management (WAC)

I found this income play today while posting on Twitter. The tweet was from Hedgefundinvest: “Sleeper value play WAC seems to be hanging in there post earnings call. Very rich dividend yield which mgmt has reiterated support for.” Sounded interesting so I did some research.

Walter Investment Managment (WAC) is in the mortgage investment field: “[A] mortgage servicer, asset manager and portfolio owner specializing in subprime, non-conforming and other credit-challenged mortgage assets,” according to the company website. Last April, it restructured itself into a REIT (real-estate investment trust) and has since been trading in the $12 – $18 range with most of the activity centered between $13 and $15.

WAC Weekly Chart 2-23-10

WAC Daily Chart 2-23-10

The company pays a nice dividend in May, August, November, and December. Last year, the dividend was $2 (14% dividend yield) and as Hedgefundinvest twitted above, management is supporting the current dividend. (This fact wasn’t in any news story I could find so I’m surmising that it came from the company’s conference call on 2/12/10. Yes, I’m that lazy.)

You may feel that investing in subprime mortgages right now could be foolhardy since the other shoe is about to drop on adjustable rate mortgages (ARMs). But considering the experience of the company’s management team, major recent insider buying (and grants), the fact that coverage was initiated by three analysts late last year (two to outperform and one to buy), and the fact that the stock price hasn’t dropped below its recent price range for several months, I’m having a tough time finding a reason not to like this company.

Options plays
This company also has options, albeit only two months out. Front month near-the-money options are fairly liquid (2k-9k open interest) but there’s not a lot of premium to be had. Savvy options traders who want to own the stock might want to write the March 12.5 put at a better price than the $0.20 currently offered. Covered call writers should probably wait until the stock (or the VIX) heads higher before writing the March 15 call. The April 15 call is currently trading in the $0.30 – $0.45 range.

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