Brad’s Note: Things move quickly in the markets, and real estate is no exception.
One day a subsector could be completely out of fashion. A few months later, everyone is scrambling to buy shares and regrets they didn’t sooner. I’ve seen it countless times over my real estate career as a developer and analyst.
That’s how I know the best way to prepare for these shifts is like a smart Black Friday shopper. Know what you want in advance. And exactly at what price.
That’s how we invest at Wide Moat Research. We identify the most attractive companies. Then, we wait until they are on sale. Preferably a Black Friday-level sale. We cover hundreds of dividend-paying companies, so there’s always a bargain to be found.
My analyst Stephen Hester has the background to help pinpoint those deals. One of the hottest parts of the real estate market is now sharply out of favor. And today, we’ll share what it is and how you can score a good deal on a great company within it before sentiment shifts again.
I haven’t watched cable news in at least 10 years. But I don’t need to in order to know the expression “bad news sells” applies. Simply because it works.
Investors fall prey to it, too. When a certain industry falls out of favor, it falls hard. Many investors are blinded by momentum, and the media is there to confirm every fear that’s ever crossed their minds.
My financial services career began right before the Great Recession in the hedge fund industry. Back then, the financial news was more bearish than any other during our lifetimes. I had millions of dollars in capital to invest… and I shared in the gains and losses.
But these were dangerous times. By the time the recession ended, several traders sitting within 10 feet of my desk lost it all. And the real losses only occur after the money is gone.
A few also made enough money to support their families for 100 years. What separated the two?
Luck plays a role. But after working alongside hundreds of traders, I can gauge the difference between luck and skill. I made a career out of that skill as an investment due diligence officer.
The best traders – those that stood the test of time and earned millions in the process – didn’t trade like everyone else.
They knew exactly what stocks or options they had an edge in. They also knew when – and when not – to invest. And they kept a close eye on risk management. They had a system.
Our system at Wide Moat Research is fundamentals based. We study relevant supply and demand trends, key macro data, and financial statements. Our focus is on high-quality dividend-paying companies.
We know what to invest in – and when.
So today, I’ll tell you which area our research is showing is actually an opportunity. And how you can avoid the mistake of overlooking it out of fear right now.
Looking Beyond the Conventional Narrative
Here’s something you may have read or seen on the news: Thanks to higher interest rates and a general slowdown in the economy, new homes sales have fallen off a cliff. The market is a total disaster.
But is it true?
October home sales were down only 5.8% from the same month in 2021. October was also 7.5% higher than September. And much of 2020 and 2021’s numbers are above the trend line.
There’s bearish data, but most point toward “normal.” But normal doesn’t make headlines, does it? Instead, we hear about how certain subsectors are suffering and highly expensive.
Let’s take single-family rentals, for example. There are several Real Estate Investment Trusts (REITs) specializing these properties.
For many years, it was the darling subsector of retail and institutional investors alike. It was almost impossible to buy one of these REITs at a good valuation.
But now, sentiment has done a 180. And we can take advantage of that…
An Unfairly Overlooked Stock
American Homes 4 Rent (AMH) is the largest single-family rental REIT with a $13 billion market cap. While other companies struggle, AMH expects 13.2% cash flow growth in 2022. Its investment-grade balance sheet and focus in the South and Southeast regions of the U.S. have paid major dividends.
This much is true: Higher interest rates have put a major dent in new home construction. There is less housing per capita than before. Affordability is worse as higher rates offset the decline in home prices.
And all that makes AMH’s single-family rental business likely more valuable today than when everyone was bullish on the sector.
But the real estate market has abandoned its former favorite asset class. AMH’s stock is down over 20% in the past year.
However, when we look at the fundamentals, we see major long-term potential. We have little doubt the stock will eventually revisit 52-week highs. Buyers today could be sitting on a 36% capital gain and earn a healthy 2.25% annual dividend yield while they wait.
As investors, we can’t control the market. The key is realizing you don’t need to. We only need to control how we react.
And there’s no better time to invest in quality dividend stocks than when the news headlines scream not to.
Analyst, Intelligent Income Daily
P.S. Over at our Intelligent Income Investor advisory, we cover other REITs and dividend-paying companies in beaten-up sectors. By learning which ones have strong fundamentals to make it through volatile times in their respective sectors, you can set yourself up to profit at a discount. Click here to learn more.