Separating the best from the rest

Great investing requires two things:

You can technically achieve No. 1 without achieving No. 2. Just not for long.

If you’re looking for long-term gains, you need to understand that recognizing risk is an absolute prerequisite to controlling it. Howard Marks – billionaire co-founder and co-chairman of asset management firm Oaktree Capital – captures the idea beautifully in his book, The Most Important Thing:

Or as Benjamin Graham, the father of value investing, once wrote:

Really, every famously successful investor I can think of has acknowledged the importance of recognizing risk. And while I can’t claim any such title, I’ve seen it play out in real time repeatedly over my more than three decades as an investor, developer and analyst.

The truly outstanding men and women on and off Wall Street are at least as distinguished by their ability to control risk as by their ability to generate returns.

It’s not exactly “cool” to think about such things, I know – especially during a roaring bull market. Almost anyone can do it, and they have no problem bragging about it along the way.

But bear markets are where real wisdom starts to show, as investors are forced to identify companies that can make money regardless. Bear markets or… say… eras where businesses have to battle higher-for-longer interest rates.

There are stocks out there that are worth holding onto even now. It’s just a matter of identifying which ones know how to handle risk.

As we all now know, the Federal Reserve has returned to tightening, at least for the time being. And with capital costs remaining elevated like this, investors can no longer assume that cheap money is on its way.

There’s no rescue in sight for weak balance sheets or undisciplined acquisition strategies. Each company will have to stand or fall on its own.

As will their investors.

Then again, that’s nothing new. It might take some time, but the hype eventually subsides and stock prices start reflecting the underlying earnings power of the businesses behind them.

That’s why I don’t get too excited – or bent out of shape – by quarterly results. I want to see how companies’ profit margins hold up over years, not months. Because that’s how you can tell if they have (or don’t have):

When I research a potential portfolio pick, I don’t merely want to see that earnings are growing. Again, they could be growing because market conditions are perfect for growth.

I need to know why they’re growing, how they’re growing, and whether that growth is eating away at their balance sheets.

This is true of any investable business, including the real estate investment trusts (REITs) I’m known best for analyzing. These property-backed businesses can report impressive acquisition numbers by overpaying, borrowing too much, and/or signing contracts with weaker tenants.

Those are hazards I don’t want to associate myself, my money, or your money with.

The same is true of dividends. High yields can look so tempting. But they often cover up a multitude of sins, starting with waning cash flow.

In which case, the risk isn’t worth the short-term reward.

Whenever I examine a new company, I tend to ask seven basic questions:

These questions don’t eliminate risk altogether. Something can always go wrong. But by evaluating whether operations are going right and have been going right, my odds of being right greatly approve.

In short, I want companies with consistent profitability… durable earnings… realistically ambitious plans for the future… strong balance sheets and manageable debt maturities… worthwhile products, services, or assets… strong balance sheets and manageable debt maturities that allow it to improve shareholders’ positions… and capable management.

And I want that all regardless of whether interest rates are rising are falling.

It’s a tall order, yet there are companies out there that fill it. Better yet, those companies sometimes trade below their intrinsic value, opening up attractive opportunities to buy them.

It’s the optimal blend of risk control and return generation.

Agree Realty (NYSE: ADC) is a textbook example of a quality company.

The net-lease REIT owns 2,825 retail free-standing properties across all 50 states and the District of Columbia. As of June 30, 2026, they were 99.8% leased, with 65.8% of annualized base rent coming from investment-grade retailers.

Its weighted-average remaining lease term was 7.7 years. And Walmart, its largest tenant, accounted for only 5.8% of rent; so Agree has little concentration risk to worry about.

Its earnings record is equally compelling. Second-quarter adjusted funds from operations (AFFO) per share increased 7.4% year over year to $1.14, and management raised full-year guidance to $4.57–$4.59 per share.

Agree invested a record $502 million in Q2, with the properties it acquired coming in at a 7% weighted-average cap rate. Meanwhile, 73.2% of acquired rent came from investment-grade tenants.

This combination suggests disciplined growth rather than growth for its own sake. Management isn’t playing around with its pristine balance sheet.

I got to interview CEO Joey Agree on The Wide Moat Show yesterday. And he reinforced his commitment to quality in no uncertain terms, saying, “Diworsification is not in the cards for us. We’re going to stick to our knitting here.”

In short, just because the cost of playing just changed doesn’t mean Agree is switching strategies. It already has what it takes to continue the long game, and it doesn’t need to resort to short-term tricks in the meantime.

Agree ended Q2 with approximately $1.9 billion of liquidity and no material debt maturities until 2028. And its pro forma net debt to recurring earnings before interest, taxes, depreciation, and amortization (EBITDA) sits at 3.7x after settling outstanding forward equity.

It’s no wonder then that Fitch rates the company A- with a Stable Outlook for its tenant quality, capital access, and conservative liability profile. Agree’s monthly dividend – which annualizes to $3.204 per share and yields 4.7% – used up about 70% of second-quarter AFFO, leaving a healthy cushion.

At last check, ADC was trading at roughly 15x the midpoint of its 2026 AFFO guidance. That’s not expensive, but it’s also not bargain-basement cheap.

Still, I have to considering current market conditions alongside Agree’s well-covered monthly dividend, visible per-share growth, and strong credit profiles. As such, I still see it as being well-priced for new investors to consider.

Ultimately, separating the best from the rest isn’t about finding the fastest growth, highest yield, or most excitement. It’s about identifying businesses that can compound shareholder value through every market cycle.

It’s about holding a portfolio that helps you sleep well at night (SWAN). And Agree Realty seems like it will do that exactly that.

Happy SWAN Investing!

Brad Thomas