DNY59
The market is plummeting right now.
Interest rates are skyrocketing and investors are literally running for an exit.
S&P 500 (SPY) and 10-year US Treasuries (IEF) are shown in the table below. As interest rates rise, stock prices fall.
And with inflation still high, we can expect more rate hikes before things finally stabilize. The Federal Reserve made this clear recently, leaving investors hopeless.
But before you panic and sell your stock, you need to remember a few important things.
- Being a forward-looking machine, it is impossible to time the market.
- Recovery is always unexpected and most gains occur within days.
- Valuations are already historically low, setting significantly higher rates.
- Not all companies are affected to the same extent by rising interest rates.
- Some businesses may even benefit from this uncertain environment.
So it’s not as simple as saying, “As interest rates rise, stocks will fall further.” If it were so easy to predict the market, we would all be millionaires.
Generally speaking, timing the market is impossible. Beyond that, not all stocks react the same way to rate hikes. They have different balance sheets, different valuations, and different reactions to inflation.
The key in today’s environment is buying a business that allows you to do three things:
- Low Rating: It should already be heavily discounted so that you can enjoy a large safety margin if interest rates continue to rise.
- Strong balance sheet: Low leverage and well-stacked debt maturities so that the profitability of the business is not materially affected by interest rate hikes.
- Benefit from high inflation: This allows businesses to raise prices and grow revenues faster than costs.
Believe it or not, there are a surprising number of such businesses. Of course, in the short term it could go down (we’re not a crystal ball), but in the long run we can expect a resilient and undervalued company like this to pay off big. increase.
Below we highlight two stocks that have been accumulating following the recent correction.
KKR & Co. Inc. (KKR)
Wealth management businesses are some of my favorites because they basically allow you to make money with little to no risk to your own capital.
If you can convince other investors to invest with you, it can be a highly profitable low capital business with stable returns and rapid growth potential.
But not all wealth management businesses are created equal.
Some sub-segments of this market are highly competitive, lack barriers to entry and, as a result, lack pricing power. The best example is the exchange traded fund (“ETF”) business. BlackRock (BLK) can only charge a 0.09% fee for managing the S&P 500 ETF (SPY). Plus, investors can leave you at any time, making your returns less stable. Now that investors are fleeing, BlackRock will earn lower fees in the coming quarters.
But some other asset managers have much better pricing power and could even benefit from today’s environment.
Here we are referring to alternative asset managers such as KKR (KKR), Blackstone (BX), Carlyle Group (CG) and Brookfield Asset Management (BAM).
They specialize in less competitive asset classes such as private equity, private debt, infrastructure, energy, commercial real estate and hedge fund solutions. Because it is a volatile investment, asset managers can charge higher fees and investors have to commit to a longer term. you can’t.
Some of these asset classes are impacted by today’s environment, while others benefit from it. Importantly, when uncertainty is high, investors typically seek greater diversification, which ultimately benefits alternative asset managers.
Therefore, today’s high volatility in equity markets and lack of fixed income protection could be a tailwind for alternative asset managers able to grow their assets under management.
Nevertheless, they all fell apart as if their business was set to take a hit in the years to come.
I see this as an opportunity.
The market has overreacted to the fact that performance fees are likely to decline in the short term, but recognizes that these companies will ultimately benefit from this uncertainty in the long term. did not.
I am bullish on most major asset managers, but KKR is my number one choice. Insiders have skins that are important in the game. Main Capital recently announced it will double KKR, saying the stock will hit $136 by 2026 (he more than triples its current level). . I am currently working on a detailed investment paper for members of the High Yield Landlord.
UMH Properties (UMH)
Real estate (VNQ) is one of the best inflation hedges in the world, but not all real estate is created equal.
Some of them are more important than others, while others enjoy greater pricing power in a world of high inflation and poor economic conditions.
Manufactured residential communities can be a particularly attractive investment as they offer affordable housing and tenants typically cannot find cheaper options in the local market. This gives them pricing power in today’s world, as demand for housing is always increasing and this demand can also increase during recessions.
UMH properties
Furthermore, tenants usually (but not always!) own the home and just rent the land. It also requires less capital investment, as landlords only need to maintain the park and its associated infrastructure. Therefore, while the impact of inflation on spending is relatively small, the impact of inflation on earnings is significant.
UMH properties are my number one pick in this area for three reasons:
- Strong balance sheet: Leverage is low at just 20% and debt maturities are far apart. Therefore, the impact of rising interest rates is very limited.
- rapid growth: we recently interviewed High Yield Landlord management has learned that it expects its Funds Per Share (“FFO”) to grow by 50% over the next five years. Most of this growth is highly predictable as it comes from rising occupancy rates, rising rents and the development of new lots.
- Low Rating: Despite this rapid growth and strong balance sheet, UMH is trading at an estimated 30% discount to the value of the underlying asset. Based on FFO, it’s trading at just 16x cash flow, well covered and growing with a dividend yield of nearly 5%.
Finally, I also like that the admin has many skins in the game. They own his 10% of the company and want their stock to grow in value.
Conclusion
Just because interest rates are rising doesn’t mean anything isn’t worth buying. There are many companies that are heavily discounted and may even ultimately benefit from today’s environment. Often it is a case of short-term pain for long-term gain.
High Yield Landlord selectively accumulates businesses that have not been materially affected by rising interest rates, but are heavily discounted. We expect the fastest recovery from today’s correction.