Table of Contents
Author’s Note: This article was published on iREIT on Alpha in mid-March of 2023.
In my last article on iREIT, I made cases for why Lincoln National (LNC), Truist (TFC), and Vonovia (OTCPK:VONOY) were good “BUY”s to look at. You might expect that I no longer see these as good potentials given what’s been happening on the markets this last week, and what seems likely to continue to happen as we see further interest rate increases and chaos on the markets.
However, nothing could be further from the truth. This last week, and despite already having positions in several of these companies, I’ve added more. I’ve bought more TFC, more LNC, and more VNA (the native Vonovia ticker).
In fact, I’m making Real Estate/REITs and Finance priority capital allocations, together with cheap industrials for the coming period.
Why Contrarian Value investing works – in the long term
There’s no doubt that we’ve seen one of the most chaotic weeks in a long time. In fact, the way bond volatility has been going, we haven’t seen this much volatility in over 30 years, which is interesting to say the least.
Headlines have been near to doomsday-prophecies, with expectations seemingly that things will be going from bad to worse, as dominoes in the financial sectors start coming down – at least, supposedly.
I obviously take a different view. I view this as stress in the financial markets, as interest rate increase starts “bending” and “breaking” things that have been ongoing for the past 10 years and more. Frankly, these are things that never should have existed or been allowed in the first place, and most of the current failures of banks that we see, are a result of things, strategies and approaches that could have been executed differently by the institutions involved.
That being said, I’m steering clear of the “worst” of the fallout to banks that are peripherally affected or semi-affected, such as First Republic (FRC). The finance companies that I want to focus on here are companies that can be said to mostly be “immune” to the troubles or be necessarily punished as a result of what is happening.
This includes banks – like Truist – but it also includes Insurance and other finance companies, such as Lincoln National. During such times, we also see interest-rate sensitive companies being punished irrationally to what’s actually going on – here I include specific REITs and real estate companies, but I also include other cyclical businesses, such as those from the Industrial sector.
Remember, the market overreacts both ways. It goes too negative, and it goes too positive. In the course of the past 3 years, we’ve seen both. I managed to eke out a triple-digit gain since the COVID-19 drop, but I also missed out on much of the tech bubble due to my unwillingness to go in “that” direction.
Common during such times is seeing investors and market participants engaging in doomsday prophesizing, expecting a massive drop to turn into an even more massive drop – again and again.
When we were looking at COVID-19, I remember well many investors who at the trough, where I bought quite a bit, sat on their hands/money and said they would not touch the market until the S&P500 was 1000 points lower. There was even talk of expecting the system to collapse due to the pandemic.
Obviously, this did not happen.
Today we see the same thing. Instead of COVID-19, we have investors going against the grain, understanding and clear statements from most finance professionals that the entire system is in jeopardy, contrary to the many analyses that these instances are isolated events, mostly relatable to mismanagement, and otherwise relatable to business models that never should have been allowed to thrive in the first place (those that depend on ZIRP to even “work”).
So, A contrarian is what I am. And I can see things paying off. What am I seeing paying off, exactly, during this chaotic time?
Telecommunications, Utilities, and other sectors, in part. These investments have remained stable and successful. Since I started buying and investing in Deutsche Telekom (OTCQX:DTEGY), my investment is up over 60% including FX and dividends. Even a relatively “okay” Buy price would have resulted in double-digit market outperformance in less than 1.5 years if you’d followed my stance from January of 2022.
The same goes for Norwegian Telenor (OTCPK:TELNY), which is starting to recover and which since November of 2022 is up almost 20%, which is almost 22x the RoR of the S&P500 at the same time.
What else? What about Enel (ENLAY)?
Many of you don’t like Italian utilities – but you should, at the right price.
It pays off.
I am contrarian investor. The things I am telling you that I am buying today will not be things you view with a positive view. At least, I doubt you do.
I expect excellent RoR within 1-3 years from them, not in the near term. That is how I invest. That is why, and how I outperform the market and have outperformed things like the S&P500 not by a few percent, but by around 2x over the past 3 years.
My investing allowed me to avoid most of the downturn – because I tend to invest in things that are comparatively undervalued, which in turn tend not to drop as much, and because I avoided most tech. My ambition is to continue to either slightly, or significantly outperform larger indices over a longer period of time, while accepting shorter-term downturns and betimes larger volatility, due to investing in a contrarian manner.
This has worked for me – and it might end up working for you as well.
So, LNC, VONOY, and TFC are three companies I have been buying.
Here are 6 more opportunities.
1. Boston Properties (BXP), Highwoods Properties (HIW), and Kilroy (KRC)
My favorite Office REITs are cheap – I believe they offer immense value for the price on offer. These are BBB-rated or above, with yields at 5% or above. BXP is at 7.3% with a conservative 10x P/FFO multiple RoR of 22% (usually 17.5 P/FFO) annually. HIW is here.
And KRC is in no way worse, with its 7.2% well-covered yield, BBB, and a 10x P/FFO upside of 26.10% per year for the next 3. All of these REITs are good, all of them may see some decline in FFO, but all of them are trading at below 8x P/FFO, as though they are at risk to go out of business.
Overall, we underweight the office sector in terms of REITs, but I’m slowly adding to my positions in all three – too much to like here.
I’m LONG BXP, KRC, HIW.
2. Realty Income (O)
Recently wrote about it, but I will continue to “BUY”-rate Realty Income when it offers conservative double-digit RoR on a 15-16.5x 2025E. And as of yesterday, that is what the company does.
I recently wrote an article where I detailed this company’s immense and attractive fundamentals and upside, and nothing has changed. It’s only more attractive. My own yield on cost is closer to 5.5% given the latest raise, and I view this as a very attractive way to “park” cash with a substantial potential upside in the case of reversion.
I’m LONG O, and going Longer.
3. BASF (OTCQX:BASFY)
BASF stuck to its dividend, stuck to its guns, and has been able to see significant cash flow despite what amounts to an avalanche of troubles, impairments, and macro issues. The company retains its A and now yields close to 7.5% trading at closer to my own cost basis at €45/share for the native.
That gives us a conservative long-term upside at an 11-13x range starting at 20% per year, or 66% until 2025E, even considering a 39% EPS drop this fiscal, and going up to around 25% annually, or almost 85% in a few years. I view the downside as extremely protected in terms of company quality, and this is one of the main industrials I might “BUY” if I wasn’t already filled to the gills with BASF.
I’m LONG BASF.
4. Volkswagen (OTCPK:VWAGY)
I recently wrote quite a bit about why I view Volkswagen as attractive. The VOW3 Preference Share (which trades similarly to the native listing) now at €121 native yields over 7.2% backed by one of the largest automotive manufacturers on the planet. It also comes with a potential triple-digit upside even at just a conservative 9x P/E for the company, which is not far from where the company was less than a year ago.
The VOW3 native share, or VWAGY if you want an ADR, has an analyst undervaluation of around 40%. 21 analysts follow the stock, around 14 at “BUY” or equivalent, and the PT for the native on an average basis comes to around €172, compare to €121 today as I am writing this article.
I’m already significantly long Volkswagen, but I’m continuing to “BUY” more as well, wanting more exposure to the company and where it is going. I believe the company is bound for outperformance in the near term, regardless of how the EV revolution goes.
I’m LONG VWAGY.
5. Enel (OTCPK:ENLAY)
If you’re still not long Enel and might want to reconsider Italian utilities, here is your chance to do so. Despite some gains from the lows where I bought the lion’s share of my position, the potential upside for Enel here is still quite significant.
Even just valuing the company at today’s multiple and accounting for earnings and confirmed DPS growth, the company is set to deliver nearly 60% RoR over the next few years.
And I remind you, this is the conservative scenario that I’m showing you here. In the case of actual fair-value reversal, which might happen, we’re likely to see returns almost double that, with RoR of almost 120% in less than 3-4 years.
The combination of titanium-clad safety with BBB+, a superb, confirmed yield with DPS growth, backed by essential electricity infrastructure for an entire nation is what makes me interested in investing here. There is a lot to like about Enel here, and I have long since staked out my claim in shares at an average cost basis of below €5/share for both my private and corporate portfolio.
I’m LONG ENLAY, and I would rate this one a clear “BUY” here.
6. Bank of America (BAC), Citi (C), and other Bank/finance.
Aside from Truist, which I’ve mentioned and is my primary investment target for US banks at this time, and LNC in terms of insurance, I see the appeal in US banking in BAC and C, with double-digit conservative upsides available here at 3-4% yields for some of the nation’s largest banks.
Here is the conservative BAC upside, as I see it being valid/realistic today.
Both Citi and BAC have an upside, but BAC’s is higher, even if Citi’s yield is higher. While we’ll probably see continued pressure in banking for some time, I believe that now is an excellent time to start to create exposure to these companies to harvest some of those gains in a few years. That’s usually how I work when it comes to investing – I invest, with the expectation of holding the stock for at least a few years. If it’s less – that’s good – but usually, it’s 2-5 years, when I look at my holding period on average (though I’ve owned some stocks for over 10 years).
Both of these banks are attractive, and both of them are top-quality when looking at the US banking market. You can also look at international markets, including Canada, Scandinavia, France, Spain, and find discounts in the banking sector there.
The recent few days have seen the entire financial sector drop in valuation, not just in the US, but across the world. What was previously expensive, is now at upsides.
Citi looks like this, in terms of conservative upside.
Now, forecasting bank earnings or how the industry is going to be moving in the next year or so is a difficult thing to do.
The assumption I work from when investing in banks here, which is something I am doing, is that the banking and financial sector will see stabilization and reversal in the coming 1-3 years (as has typically been the case when they have been trading low as they are doing today).
I’m long BAC, C, and other European and international banks. Overall, 19.5% is currently my overall exposure to finance, and I’m not averse to increasing this even more – though I’m slowly adding to spread out my investments somewhat.
It’s a chaotic time in the market. For most investors, this is an unpleasant time to invest. We don’t like volatility, especially not volatility in a predominant negative direction.
Me, I’m among the investors that welcome this.
Why do I welcome this?
- I know it gives rise to once-in-a-3/5/10/50-year opportunities for returns when quality companies are undervalued.
- It enables me to, much quicker than usual, achieve a “doubling” of my overall investments, which last time around due to a mix of COVID-19, tech, and other factors, took around 3 years. I don’t expect to be able to pull this off again, but investing in cheaper companies that rise faster will likely shorten the timeframe here.
- Given how the market usually reacts and overreacts both positively and negatively, you can assume that the initial drops, or rises (if we’re in a bull market), are not representative of what’s actually going on in the company, but rather reflective of the emotions of market participants, which long-term do not have the same correlation as they do in the short term.
- I invest in high-quality world-leading stocks while remaining diversified, targeting no more than a 2-4% per stock allocation, meaning that 1-2 companies could go bankrupt without me losing significant amounts of money thanks to a YoC of close to 5%. In the scenario that I’m seeing a fundamental downturn that puts my actual portfolio in danger of collapse, we’re likely facing a far more serious situation where the state of my portfolio becomes a small concern by comparison.
- I’ve now been through no less than 5 volatile periods in my investment career and while the specifics seem to shift somewhat, the way they play out, in the end, seems to be more or less the same.
As you can see, my stance is that history will repeat itself. We’ll see volatility, yes. But we’ll also see a reversal after that volatility.
Because I believe this is the most likely scenario, this dictates my investing – and I’m buying all of these securities that I mentioned here.
What are you doing, or buying?
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.