2 Real Estate Stocks Primed For Post-Christmas Punishment

AGNC Investment Corp (NASDAQ:AGNC) and Realty Income Corp (NYSE:O) have historically struggled in the week between Christmas and New Year's

by Alex Eppstein

Published on Dec 20, 2016 at 2:26 PM

Earlier, we took a look at 30 stocks that could crumble after Christmas. One group that was notably overrepresented was real estate stocks. Specifically, one in every six post-Christmas underperformers belonged to the sector -- or five total. Below, we'll highlight two of the five -- AGNC Investment Corp (NASDAQ:AGNC) and Realty Income Corp (NYSE:O) -- explaining why any losses could potentially be compounded.

Looking at the week between Christmas and New Year's over the past eight years, AGNC has had only one positive return. On average, the stock has lost 2.9% during the week. This isn't encouraging, considering the stock has only gained about 4% in 2016 at $18.06. In short, an especially poor post-Christmas week could push the shares into negative year-to-date territory.

If this happens, AGNC could get punished as optimism in the options pits begins to unwind. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly twice as many calls as puts. The resultant call/put volume ratio of 1.93 sits in the top quartile of its annual range, hinting at a pronounced preference for bullish bets over bearish.

In addition, a bad close to 2016 could provoke even more short selling on AGNC Investment Corp. Over the last two reporting periods, short interest exploded by nearly 53%. Yet, less than 3% of the stock's float is dedicated to these bearish bets, leaving plenty of room for additional shorting activity.

As with its sector peer, O has historically struggled in the last week of the year. During the previous decade, the shares have finished higher only twice during that time frame, while their average return is a loss of 1.8%. In other words, the stock could soon see its year-to-date lead of 9.5%, at $56.55, get dented.

Should this transpire, an exodus among option bulls could exacerbate Realty Income Corp's struggles. After all, during the past two weeks, the stock has racked up a 10-day ISE/CBOE/PHLX call/put volume ratio of 2.34 -- just 13 percentage points from a 12-month high. From a contrarian perspective, this makes for a bearish setup on O shares.

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