I think I can be somewhat indecisive when it comes to allocating capital.
Why else would I spend the last few weeks researching and going back and forth on which stocks to buy.
Anyway, I think I’ve settled on the following stocks as being my top choices through the end of Oct and into Nov.
Here they are, in no particular order –
OHI – Omega Healthcare Investors
The good This SNF REIT is paying 7.38% and goes ex-dividend on
10/29 10/27 so you can capture that juicy dividend. It’s also quite cheap on a DCF basis, with a fair value of around $40-$59 (At the time of this writing it trades for only $32.24/ share). Further, it has good management, and it has a strong balance sheet. Also have you noticed that our nation is getting older? Like way older. So you could say the aging of our population is a meaningful secular trend. Has the potential for market-crushing returns. Oh, did I mention it was cheap?
The not-so-good The first thing any reasonable person should ask when seeing such a cheap stock is why. While Mr Market can be irrational or wrong, I think we should start from the perspective that in fact more often than not it can be pretty smart. And like any investment it comes down to risk/ reward. So the market I think is saying that there’s a lot of risk.
So what’s the risk here?
- Rising interest rates – I think I read somewhere that there is like a 62% chance of a rate hike in Dec. What does that mean for OHI and REITs in particular? A REIT with high amount of debt financing (more leverage) usually is more sensitive to interest rate hikes. Higher rates mean higher borrowing costs, which impacts the REIT’s growth and the value of new purchases. Further, the main catalyst for many folks moving into dividend stocks and REITs is a hunt for yield in a yield starved world. So when rates rise, other, safer alternatives become more attractive, causing flight from these assets and thus a decrease in their share price. My sense is that the latter scenario isn’t anything we have to worry about for some time, since a) it’s not clear that the Fed will raise rates (they could just be bluffing again), and b) any pace of rate increase will be so incremental
- The type of debt OHI carries – 42% of OHI’s debt is variable debt, meaning that it will increase if interest rates rise. By comparison, the other big healthcare REITs only have about 10-15% variable debt. OHI has a credit revolver and several term loans with floating rates. These floating rates are based on an underlying benchmark rate (LIBOR). This means that a possible interest rate hike would directly lead to a higher interest expense for a big part of OHI’s debt portion. (Source)
- Medicare/ Governmental risks – This is the biggest threat to OHIs investment thesis, and one that nearly destroyed it in the past, and could do so in the future. SNFs will always have more risk by virtue of the fact that they are at the mercy of Medicare/ government spending. And with Obamacare premiums going up, there seems to be groundswell revolt going on where we don’t really know what will become of spending. Even Bill Clinton said Obamacare was the craziest thing in the world. So let’s say there are cuts to SNFs. In a scenario where there’s declining revenue and an overleveraged company, access to capital markets will become more difficult. And then KAPLOW to the business, like in the Batman comics.
The verdict. I am obviously conflicted on this one given the amount I’ve written here back and forth. That said, I will probably pass as I am somewhat conservative in outlook and don’t need to take every opportunity that comes my way. Still, I am seriously considering investing in OHI for the attractive valuation and yield, as well as for REIT exposure. Knowing full well that this holding would need to be monitored and is not to my mind at least a sleep well at night kind of stock.
MO – Altria
The good It’s an addictive product and a history of good returns. It’s ace in the hole is a 27% stake in SABMiller, which offers the company significant financial flexibility should they ever decide to liquidate that holding. Has a hefty and safe dividend yield. Has significant pricing strength.
The not-so-good Not much bad IMHO. I think it’s on the high side of fair value, especially after a nice pop last Friday. Smoking is in long-term decline in the US.
The verdict. Right now it’s trading at about $64. If it corrects 10%, I’d probably pull the trigger.
HAS – Hasbro
The good The high quality toy giant is an interesting choice and one I don’t really see any discussion of in the various DGI blogs I check on a regular basis. Hasbro is currently in the process of transitioning from a physical toy maker as it has been traditionally thought of to a licensing firm. It’s asset light, high ROIC higher margin entertainment & licensing segment has seen profit growing at a high rate. Hasbro has a high amount of free cash flow which allows it to cover it’s dividend payments easily. Pays 2.47% – not crazy amazing, but solid.
The not-so-good Valuation. It’s near the upper bound of it’s fair value range.
The verdict. Sometimes you have to pay for quality, so if it dips a bit I may consider picking up a few shares and play with my toys all the way to the bank.
AAPL – Apple
The good Has the “mother of all balance sheets.” (Tim Cook) with like $228 Bn. Reminds me nothing of my bank account, unfortunately. Shares also remain cheap. Makes you wonder why they’re issuing debt.
The not-so-good Like Google being all about Adwords, Apple is all about the iPhone. Trends going in the wrong way. Decreasing iPhone sales. I have this perception that it’s best days are behind it because they haven’t really done anything amazing since Steve Jobs passed. Also I heard their auto program which I was excited about seems to be not going anywhere. Where’s the revolutionary, industry changing technology – rather than just incremental iPhone improvements?
The verdict. This is a quintessential buy and hold stock and they have tons of room to run with their dividend growth. However, I have so much exposure to technology that I probably will pass, even though I want to add to my rather small position. I actually held $15,000 back in 2007 which I had to liquidate due to a divorce, so obviously I’m kicking myself there. For someone without technology exposure and into dividends, Apple could be a solid long term choice.
BWLD – Buffalo Wild Wings
The good Cheap stock, good potential. Trading about $140 with a fair value estimate in the $190 range. They have a ton of room to grow. Their new PizzaRev concept could do to Pizza what Chipotle did to Mexican. Some hedge funds are speculating this stock could double or triple. From what I can see, I would agree with this.
The not-so-good Well they don’t pay a dividend so it’s not doing anything for my immediate passive income flow. But this isn’t a deal breaker since I’ll really buy any equity I believe in and think is a value. Restaurant sales have been slammed as of late.
The verdict. I was sitting on the sidelines today going back and forth on this before earnings whether I wanted to buy or not, because they had just dropped 3% the day before earnings. Restaurant margins had been under pressure and so I had been betting that odds were that I’d be able to pick up some shares for even cheaper tomorrow. So much for odds – the stock popped 4.6% in after hours trading (at the time of this writing), so I feel like a dummy to pay more. I guess that’s just my own psychological issues to work out. Still, I may pull the trigger since I think shares remain trading for significantly under their true value.
CBRL – Cracker Barrel
The good CBRL seems like an odd choice I suppose, but this full service restaurant chain has a lot of things going for it: It has yummy food, a differentiated concept – It has a unique Southern country heritage, family friendly concept with rocking chairs. And it’s trading for cheap, given that they’ve been slammed all year, and now trading at $132, with an objective fair value of around $171. They are very shareholder friendly, paying a nice dividend yield of 3.48% at the time of this writing and have a history paying out “special” dividends as well.
The not-so-good 4th quarter results & guidance weren’t so great. Headwinds in the larger restaurant industry remain ongoing.
The verdict. It’s sometimes an opportunity to invest in a good company when macrotrends are going against it. This could be an opportunity to pick up a company with an attractive yield and chance for price appreciation.
Adding to My Generals
I recently opened a new position in General Electric, and wrote about this at length recently. I don’t think much is happening here for the shorter term, non-patient investor, and may be additional downside, but think that this is a good long term turnaround story. If shares drop under $27 in the short term I will likely just buy more shares.
In August, I entered into the General Motors, mostly for the yield, and because they are so cheap, trading at just 4 times earnings. That is insanely cheap and I think a lot of the downside risk is already baked in to the price. That said, as with everything, I could be completely wrong. If prices decline further, I would buy some more.
So there you have it. My top choices right now. At least the ones I can remember. What’s on your watchlist? Are there any here that you are considering or not considering? Why or why not?
Full disclosure: Long GM, GE, AAPL.