I Need To Invest $30,000 – Here Are My Picks, And Why REITs Are Good

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Dear subscribers,

One of the issues about running a dividend-oriented investment portfolio is the steady inflow of cash on a monthly, continual basis.

One of the issues of running an EU-centric portfolio like this is that there are weighting issues with the dividend payouts, specifically a massive tilting towards the months of March, April, and May, as well as October and November. April and May are particularly heavy in terms of payouts.

In order so as not to get unnecessarily cash-heavy at any time (which I would consider more than 5%), I consider it a good practice to invest continually. Even if I sometimes am not able to follow this to the letter (because I do watch market ups and downs), I do try to invest some money each month.

A dangerous period

The period we’re now entering is incredibly dangerous.

I say this because we’re entering a period of higher interest rates, but also higher inflation, as well as the deadly combination of seeming low growth. This has the term “stagflation”.

Monetary inflation essentially means that the amount of money or currency available grows. If money expands more rapidly than does associated resources such as metals, chemicals, and labor, this has the net result of price increases, because demand is higher than supply.

Not all that complicated. I don’t intend to make this an article on inflation generally – there are excellent resources that go exactly into this sort of thing. What I want to tell you is that holding cash or any type of low-yielding currency asset with a below-inflation level return, is a good way to get a nice RoR haircut. While this is generally true (savings rates and bond yields are usually below that of stocks, at least on average for the past few decades), a period of Stagflation highlights this even more.

What we want to make sure of, in this sort of environment, is that we don’t lose, or lose as little of our purchasing power and returns as humanly possible. This can obviously be done in a variety of ways and investments. And I’m not even claiming that equity investments, as a whole, would outperform. History shows us that the general, broader market actually does fairly poorly in stagflation because companies can no longer predict costs and earnings. This is something of what we’re currently seeing in the market, and in many of the companies, I write about.

Still, I will argue that as a whole, stock investments, in particular in sectors like Real Estate/REITs, investments in commodities such as metals, oil, chemicals, and other things, tend to do well as long as you buy them at low valuations.

That is what I intend to do.

My plan

I’ve never really held any sort of plan to try and “time” the market to any greater degree. I do hold onto my cash when I feel that there are relatively few bargains, and I do push cash more when I view that there are “more bargains”, but In general I’ve never been the sort of person to save up $200,000 in order to invest when “everything falls”. I don’t have 10 kilograms of gold at home either. Those solutions just aren’t for me.

Market timing doesn’t work. Time in the market does.

As such, what I do is put money to work at a pace that I am comfortable with. next to this, I maintain a cash position of around 1-5% depending on my expenses to act as a private buffer. However, the pace at which capital flows in from salary jobs and dividends really undermine the necessity of massive piles of cash lying about earning only 0.5-2% yield in some sort of bond.

I also don’t really care if we, say, go down 10% this year. Or 25%. Or even more. No one can predict what the market will do in the next 12 months. Oh, we can listen to pundits use tools to predict recessions and try to time things. All this does, makes us uncertain as to when to invest.

Instead of focusing on the companies, we focus on the market as a whole, when there really is no such thing as “The entire market”.

The market is made up of thousands, of tens of thousands moving parts, such as companies, each trading at different valuations and expectations.

Instead of trying to time patterns and macro trends, what I do is:

  • Pick the best companies with the highest quality, safety, dividend, and upside.
  • Invest in them, until I reach my target allocation.
  • Keep them until they reach their desired valuation. Then trim/rotate.
  • Repeat the process as needed.

Is it perfect?

No, nothing is.

I make mistakes, and sometimes I’m in the red for 1-3 years before an upside presents itself. But ever since sticking to fundamental quality and these simple rules, I can honestly say I haven’t regretted an investment I’ve made. The model works for me – and I believe it might work for some of you as well.

So, I have $30,000 incoming – here are my picks and allocations for that money.

1. Verizon Communications (VZ) – 23% annual RoR

You can’t really beat a 5.5%-yielding Telco with an upside well above 20% annually, even just on a 12.2x forward P/E. This company is BBB+ rated and currently trades with an average weighted P/E of less than 9X. It’s also one of the top three telcos in all of the USA in terms of the number of subscribers.

I’m very happy to pick up a decent number of shares in the company following this significant decline and lock in a yield close to my original YoC for my position.

The upside for this company is significant – over 70% in less than 3 years even if they just go up to a 12X multiple. Verizon ticks all of my boxes – quality, safety, dividend, and upside.

It’s a “BUY” here. At least $60 PT, and potentially higher.

Verizon Upside (VZ IR)

I would allocate around 15% of my capital to Verizon in May.

2. Simon Property Group (SPG) – 20% annual RoR

I bought the lion’s share of my stake in SPG during sub-$70/share targets, which means that even at today’s prices, I’m still significantly up in my SPG investment. Why should you “BUY” REITs during a stagflationary environment? Several reasons. While my esteemed colleague Brad Thomas could explain the details better, simply put rents and values tend to increase when prices do. This supports REIT dividend growth and tends to inflation-proof their income streams even during long periods of inflation. REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last twenty years.

REITs & Dividends (Nareit/S&P Global)

It’s a very common assertion that REITs underperform when the interest rates rise. This is wrong, based on historical data. Interest rates do impact real estate values and they do lead to higher borrowing costs and potential devaluation of property. Some also argue that higher interest rates put pressure on the dividend, making them less appealing to decent-yielding bonds for securities.

However, historical analysis shows that REITs have provided protection against inflation and outperformed broader stock markets during both moderate and high inflation periods. In fact, this has been true in five of the eight inflationary spikes since 1970.

REIT returns, Inflation (Sanlam UK)

Worldwide leases tend to have rents indexed against a measure of inflation, or have some sort of annual escalators tied to their terms – this includes contracts in Europe. Also, property values increase lock-step with increases in prices in labor, material, land, and construction, as this makes producing new capacity less viable without proportional increases in rental levels, which cuts the availability and appeal of new supply.

This leads to an entry barrier. Tendentially, we can say that sub-sectors with shorter lease terms should outperform longer, fixed leases during inflationary periods because shorter leases can be adjusted more flexibly than longer – ones while longer leases provide protection through adjustments and new rent levels.

Due to supply constraints, property sub-sectors enjoying a high demand should also experience more favorable trends than lower-demand sectors. REIT sectors bolstered by demand combined with a limited new level of supply means that we should focus our attention on fundamentally strong REITs/strong real estate companies.

SPG is one of them. But there are, frankly, many that are fundamentally qualitative.

Looking at the REIT with an A-rating and a yield of no less than 6.42% here, this company is set to potentially soar back to a 13x-14x P/FFO level, based on a reversion to the mean, with a 61% RoR, or nearly 20% annually.

Simon Property Group Upside (F.A.S.T. Graphs)

Safety, stability, fundamentals, upside. Remember my mantra.

This works here. I’m putting 15-20% in SPG and other similar-level REITs, and you should consider the same.

3. HeidelbergCement (OTCPK:HDELY) – 20-30% annual upside

Remember that I spoke of commodities? Concrete is one such commodity world construction cannot do without. Due to the massive replacement costs for capacities that are still being utilized, and punishing Co2 taxation and complications, not to mention increased labor costs, land costs, and machine costs for these companies, replacing current legacy concrete/aggregate capacity is a no-go.

While concrete companies like HeidelbergCement are being punished very heavily in today’s market, I’m pushing capital into the company. It’s solidly managed, it’s one of the largest concrete pushers/manufacturers on the planet, and it has solid upsides.

Look, megatrends are favoring Heidelberg. The ongoing global urbanization means that 50M more people on an annual basis live in cities. This will drive the demand for cement. I won’t go into an entire Tobin q-replacement analysis of the company’s set of assets. Let me instead put it clear that the cost of replacing Heidelberg’s assets is now higher than the NAV/share, or NAV of the company. In simple words, to even begin to be able to do what Heidelberg does, a company would have to spend significantly more than Heidelberg, on a per-share basis/NAV, is currently being valued.

And this spread is increasing as labor costs, land costs and inflation pressures come down even harder on the thesis here.

I view HeidelbergCement as an absolutely solid buy with an upside of around 50%, and would consider going 10-15% in this company here.

4. BASF (OTCQX:BASFY) – ~35% annual upside

BASF is sort of the same case. Chemical commodities with global production and supply networks at what is unquestionably a discount to any sort of fair valuation. I’ve been through the case for BASF in a few other articles before – but basically, the case is that even with Russia/Ukraine, energy crisis and supply chain crisis, the long-term BASF upside is well over 50% at this time – and around 30-40% to any sort of conservative fair value.

The one massive downside is the IPO of Wintershall DEA, which is indefinitely postponed given the current challenges. I’ve also accounted for further impacts related to energy and China challenges, lowering my overall PT on BASF to around €71/share for the near term. 1Q22 was recently reported, and the impairment for DEA was more moderate than expected, while the surface technology segment provided worse results than expected. All in all though, 1Q22 was a good quarter, and 2Q22 is also likely to be one.

However, many analysts believe in continued challenges towards the end of 2022 as well as going into 2023. Some analysts believe these headwinds to be far more long-term than I do, maybe towards the end of 2023.

Me, I argue that the inevitable upside has only been postponed and comes at a cheaper current price, given the excellent dividend coverage. There’s still massive demand, and the company’s crackers are running at 90%+ utilization rates, which helps solidify the rates. All in all, all chemicals segments are above average in terms of margins despite cost pressures and inflation.

The upside for BASF is significant – I will say “massive”. That’s why I’m at 5% exposure to BASF with a cost basis below €51/share.

Forecasts from FactSet call for a 2022E 19% EPS decline. This is in line with S&P Global. I agree with these forecasts, after which the EPS will slowly reverse. Based on excellent 1Q22 and 2Q22 numbers, it’s even possible that we’ll see far closer to “flat” numbers for this business.

But you need to be able to stomach the ups and downs of owning chemicals and commodities.

BASF Upside (F.A.S.T. Graphs)

It’s not an easy trend to stomach – but I firmly believe the upside will be worth it.

I would go 10-15% capital allocation to BASF here.

5. AT&T (T) – 28% annual upside

Put away your allergy medicine, dear readers – because AT&T is no longer the dog you believe it to be. With the removal of streaming and content assets, it leaves AT&T on a not-dissimilar level to Verizon. What’s more, it yields more than its competitor, and based on current forecasts, is going to see a 32% 2022E EPS growth. This translates to an annualized upside of 28% until 2024E.

Is it realistic? Yes, I believe so. An unburdened AT&T is one of the best telco’s in the entire nation, with one of the largest infrastructure assets out there. To those arguing about the company uncertainty, let’s remember that the company has already delivered solid operational results for 1Q22, including a 1.6% revenue growth (excluding video), and absolutely stellar FCF. The company added fiber, added phones, received $40.4B of cash and retention of debt, and paid out in shares (which I went ahead and sold). This also resulted in massive net debt reduction, with more than 90% of the remaining debt at fixed rates maturing in 2024, 2026, and beyond for the most part.

Numbers don’t lie. And the upside for AT&T based on current EPS expectations is nothing short of amazing.

To those arguing quality and performance with me – do you recall Kraft Heinz (KHC)? Don’t you wish that you would have invested when the company hit rock bottom, to the tune of close to 80% RoR in less than 2 years?

Quality businesses, even troubled ones, reverse. Eventually, you can’t keep quality down. I argue AT&T is in a good position for this now.

AT&T Upside (F.A.S.T. Graphs)

Numbers don’t lie. I would allocate 10-15% to AT&T here, and consider it cheap. I believe if you look back in 5 years, you would consider it cheap as well.

6. Fresenius (OTCPK:FSNUY) or STORE Capital (STOR) – 20-30% annual RoR

After the first 5, we’re getting into what I would consider sub-30% annual upsides. That isn’t to say that there aren’t companies that don’t fulfill my criteria, but I’m very stringent when it comes to quality and size for my conservative portfolio positions.

Only the best of the best qualify – 9 out of 10 companies I look at are usually cut away for one reason or another, for articles like this. “Making the cut” here comes at a massive demanded upside. There are a lot of good companies, but few “great” upsides.

Fresenius though, I believe there’s still upside to be had there – and a massive one. I recently published an update article on them, and I want you to go read it if you’re curious as to my logic here. Suffice to say, the upside is still 30% here to a conservative forward valuation, but it might take some time for the company to see this realized. The company yields over 4% at this time.

Fresenius Upside (F.A.S.T. Graphs)

However, I wouldn’t be doing my job as an analyst if I left you only with Fresenius as a choice. You might not want the EU or the pharma exposure. So, my second choice, you might argue is more in line with the times, is STORE Capital.

STORE Capital has been heavily punished to where the company’s valuation has gone off the deep end. Based on a 5-6% FFO growth going forward, there’s a significant upside to this investment-graded, well-managed REIT even without Volk at the helm. Some call the company’s portfolio less qualitative than its peers. I say the company is qualitative, worth a second look, and a “BUY” to me. Its fundamentals speak for themselves, with a strong history of value creation and focus on profitability. The company’s pipeline and portfolio will, I believe, do very well in the coming overall market.

STORE manages lease terms of 13.4 years on average, and it’s massively diversified in terms of ABR. Total debt is only at 40% leverage, and the lease escalations of over 2.5% annually while not necessarily outpacing rate and inflation increases, will do very well in making sure that the REIT’s growth continues.

I view the company as having a 20%+ upside – and what’s more, the yield is well over 5.5% here and well-covered.

STORE Capital Upside (F.A.S.T. Graphs)

Putting it together

I told you, my approach isn’t perfect. No approach is. There are plenty of approaches out there that result in above-average capital appreciation and dividends. But I am confident in my approach. It has allowed me to outpace the market year after year since I started investing, and adopted that approach. As I’ve been refining it and learning more about “who I am” as an investor, I’ve found ways to leverage this and myself in how I invest.

While I can’t guarantee good results, I can show you that this approach has been working extremely well for me in mitigating the worst of the YTD’s stock market uncertainty.

Portfolio 2022 YTD RoR (Nordnet)

Take a look at the above. That’s my non-SEK portfolio. Inclusive of SEK, that upside is down to about 9.8% YTD – still decent, but less so than just my Euro/NA portfolio. This isn’t an accident. I’ve made multiple trades in this portfolio that have ensured this outcome over this year, such as rotating AbbVie (ABBV), selling off parts of Amgen (AMGN), and selling off Fortum (OTCPK:FOJCF), and other things. I know my companies, and where they should be trading – when to rotate, and when not to.

Nothing of this is complicated, and this is what I’m in the business of doing here. Providing “BUY” articles “HOLD” articles and coverage articles. It’s the approach that I use, and it’s the approach I’m teaching 2 close friends of mine to use.

Once mixed with the expertise from other contributors that I trust and follow, it becomes what I view as an unbeatable, SWAN-type portfolio that really just allows me to shrug off any market blow that can be thrown at me, such as going through the entire COVID-19 crash with little care whatsoever with regards to my portfolio value.

Why?

Because I was certain of the qualities of the companies I invest in – either I or someone I trust has researched them.

I hope you can feel some of the same type of certainty when you view some of my work.

These are my current picks, and the companies I intend to allocate capital to.

Any questions? Let me know!