Armour Residential REIT (NYSE: ARR) stock should rise 500% at the open. ARR stock rising 5x is not a result of the company suddenly finding more money down the back of the corporate couch. Rather, this is a technical move intended to improve the marketability of the corporate stock. As such this is a purely nominal price change, not a real one. The real price change will be whatever the price movement is other than the 500%.
As to what’s done at Armour: “ARMOUR Residential REIT, Inc. invests in residential mortgage-backed securities (MBS) in the United States. The company’s securities portfolio primarily consists of the United States Government-sponsored entity's (GSE) and the Government National Mortgage Administration’s issued or guaranteed securities backed by fixed rate, hybrid adjustable rate, and adjustable-rate home loans, as well as unsecured notes and bonds issued by the GSE and the United States treasuries, as well as money market instruments.” Well, an interesting line of business, obviously, and also equally obviously one that’s been hard hit by rising interest rates. Indeed there was something of a scare early this year in that valuation movements might be a significant liquidity and capitalisation problem.
The particular problem to be solved here is that we humans have ideas about what the “right” piece for a stock is. On the New York markets that’s in the $10 to $100 range. That’s just historical happenstance but it’s still a real thing. So, a financial stock like Armour trading at $4 and $5? That looks cheap - and cheap in the sense of not worth it, not cheap as in the sense of let’s buy more of this.
So, something should be done and that something is simply to declare that 5 old shares will become one new one - a one for five reverse stock split: “a reverse stock split of ARMOUR's outstanding shares of common stock at a ratio of one-for-five and the September 2023 dividend for the Company's Common Stock.” That took effect Friday at the close and so will be registered on the ticker this morning. This doesn’t change, not directly, the market capitalization of the company, just the number of shares that make it up. Therefore the stock price reacts mechanically, up 500% or 5x. At which point Armour stock trades in that range that we think “right” for a solid financial stock.
Yes, this is all about just a foible in human psychology but as markets are made up of humans it’s often worth doing.
