An analyst details a relative value swap strategy among Chimera's three preferred shares, targeting 10%+ yields with CIM.PR.B in buy range and CIM.PR.C below $22.67.
Alpha Score of 56 reflects moderate overall profile with weak momentum, strong value, weak quality, weak sentiment.
Chimera Investment Corp. has three preferred shares that a Seeking Alpha contributor uses in a relative-value swap strategy. The contributor focuses on CIM.PR.B and CIM.PR.C, with CIM.PR.D also part of the rotation. The contributor said the strategy has delivered dividend yields above 10% without taking on the risks of the common stock.
CIM.PR.B is currently in a buy range. CIM.PR.D is in a hold range. CIM.PR.C is also in a hold range. The contributor said it would enter a buy range if the price falls below $22.67.
The strategy was tested in late March. The contributor identified CIM.C as undervalued relative to other mortgage REIT floating-rate preferreds, including the other Chimera preferreds. The gap in yield was wide. The contributor bought CIM.C, betting that the valuation gap would shrink. Over the following month, CIM.C rallied and outperformed the comparable shares. The contributor sold after the relative value had been captured. The decision was not based on a change in view on Chimera.
Less than two months later, Chimera's preferred shares sold off rapidly over a week. The contributor checked the common stock for any fundamental shift. The common shares were trading higher than a week earlier. The selloff appeared to be driven by an imbalance of sellers over buyers, not a change in the company's prospects. The contributor bought CIM.B and CIM.C at attractive valuations.
A few days later, CIM.C recovered quickly. The contributor swapped out of CIM.C and into MFA.C, a preferred share from MFA Financial Inc., because MFA.C offered a better risk-reward profile at that point. The contributor said the goal is to consistently own the preferred share with the best upside potential relative to its risk and to other preferreds.
MFA Financial Inc. has an Alpha Score of 68 out of 100 with a Moderate label. It operates in the Real Estate sector, according to AlphaScala data.
The contributor holds long positions in CIM.PR.B and MFA.PR.C.
This approach does not require predicting where preferred share prices will go in isolation. It relies on relative valuations and the willingness to swap when opportunities arise. The contributor said CIM.B currently offers the most attractive valuation among the three Chimera preferreds. CIM.D is approaching a buy range. It remains closer to fair value.
The selloff in Chimera preferreds earlier this year created the exposure that the contributor exploited. The timeline from late March to the recent trades shows how quickly relative value gaps can open and close. The affected assets are the three Chimera preferreds and the MFA preferred. The risk of further downside is reduced when the common stock remains stable and fundamentals are unchanged. The risk would increase if a fundamental deterioration in Chimera's business emerged. The contributor found no evidence of that.
Drafted by a large language model from the source reporting linked above, then screened by automated publishing checks. It is not read by a journalist before publication. Some articles cite our Alpha Score. Verify prices and figures against the original source. Educational coverage, not personalized advice.