What’s happening in the markets lately? Since the beginning of this year, we have seen a prolonged downtrend and now a cycle of high volatility. Investors could be forgiven for feeling some confusion, or even some whiplash, trying to track the rapid ups and downs of recent weeks.
However, one important fact stands out. Over the past three months, since mid-June, we’ve seen ups and downs – but the markets haven’t seriously challenged that mid-June low. Investigating the situation from research firm Fundstrat, Tom Lee makes some extrapolations from this observation.
First, Lee points out that about 73% of S&P-listed stocks are in a true bear market, having fallen more than 20% since their peak. Historically, he notes that such a high rate is a sign that the market has bottomed — and he notes that S&P bottoms tend to come shortly after the inflation rate peaks.
Which brings us to Lee’s second point: Annual inflation in June clocked in at 9.1%, and in the two readings since then it has eased 0.8 points to 8.3%.
Getting to the bottom line, Lee advises investors to “buy the dip,” saying, “Even for those in the ‘inflationist’ camp or even the ‘we’re in a long-term bear’ camp, the fact is that if the core CPI peaks, the most -low equity levels in June 2022 should be permanent.’
Some Wall Street analysts seem to agree, at least in part. They recommend certain stocks as “buys” right now – but they recommend stocks with high dividend yields, on the order of 8% or higher. Such a high yield will offer real protection against inflation, providing a cushion for cautious investors – those in the “inflationist” group. We have used TipRanks database to download some details about this recent election; here they are, along with analyst commentary.
Rhythm Capital Corp. (RHYTHM)
We’re talking dividends here, so we’ll start with a real estate investment trust (REIT). These companies have long been known for their high and reliable dividends and are often used in hedge portfolio arrangements. Rithm Capital is the new name and brand of an older, established company, New Residential, which is converting to an internally managed REIT effective last August 2nd.
Rithm generates returns for its investors through smart investments in the real estate sector. The company provides both capital and services – ie. credit and mortgage services – both for investors and consumers. The company’s portfolio includes lending, real estate securities, real estate and residential mortgage loans and MSR-related investments, with the majority of the portfolio, approximately 42%, being in mortgage servicing.
Overall, Rithm has $35 billion in assets and $7 billion in equity investments. The company has paid out over $4.1 billion in total dividends since it was first founded in 2013, and as of 2Q22 boasted a book value per common share of $12.28.
During the same Q2, the last one operating as New Resi, the company showed two key indicators of interest to investors. First, available distribution revenue totaled $145.8 million; and second, of that amount the company distributed $116.7 million through its common stock dividend, for a payment of 25 cents per share. This was the fourth consecutive quarter with a dividend paid at this level. Annual payment of $1 yields 11%. This is more than enough under current conditions to provide a realistic rate of return for ordinary shareholders.
RBC Capital’s Kenneth Lee, a 5-star analyst, lays out several reasons behind this name: “We view RITM’s available cash and liquidity position favorably given potential deployment in attractive opportunities. We support the continued diversification of RITM’s business model and its ability to allocate capital across strategies as well as its differentiated ability to create assets… We have an Outperform rating on RITM shares given the potential benefit to BVPS from rising rates.”
This Outperform (i.e. Buy) rating is supported by a $12 price target, implying a one-year gain of 33%. Based on the current dividend yield and expected price appreciation, the stock has a ~44% potential total return profile. (To watch Lee’s record, Press here)
Although only three analysts follow this stock, they all agree that it is a buy, making the Strong Buy consensus rating unanimous. Shares are trading at $9 and their average price target of $12.50 suggests ~39% upside over the next year. (See the RITM stock forecast at TipRanks)
Omega Healthcare Investors (OHI)
The second company we’ll look at, Omega, combines the functions of both healthcare providers and REITs, an interesting niche that Omega has filled competently. The company owns a portfolio of skilled nursing facilities (SNFs) and nursing homes (SHFs), with investments totaling approximately $9.8 billion. The portfolio leans towards SNF (76%), with the remainder in SHF.
The Omega portfolio generated $92 million in net income for 2Q12, up 5.7% from $87 million in the prior quarter. On a per-share basis, that came to 38 cents EPS in 2Q22, versus 36 cents a year earlier. The company had adjusted funds from operations (adjusted FFO) of $185 million in the quarter, down 10% year over year from $207 million. Of importance to investors, FFO includes a fund available for distribution (FAD) of $172 million. Again, this is down from 2Q21 ($197 million), but enough to cover current dividend payments.
This dividend was declared on common stock at 67 cents per share. This dividend grows annually to $2.68 and yields a strong 8.4%. The last dividend was paid in August. In addition to paying dividends, Omega supports its share price through a share buyback program, and in the second quarter the company spent $115 million to buy back 4.2 million shares.
Assessing Omega’s Q2 results, Stifel analyst Stephen Manaker believes the quarter was “better than expected.” The 5-star analyst wrote: “Headwinds remain, including the effects of COVID on employment and high costs (especially labor). But employment is increasing and should improve further (assuming there is no recurrence of COVID), and labor costs appear to be rising at a slower rate.”
“We continue to believe the share price is attractive; they trade at 10.2x our 2023 AFFO, we expect 3.7% growth in 2023, and the balance sheet remains a source of strength. We also believe that OHI will maintain its dividend as long as the recovery continues at an acceptable pace,” the analyst concluded.
Manaker follows his comments with a Buy rating and a $36 price target, indicating his confidence in a 14% upside over a one-year horizon. (To watch Manaker’s record, Press here)
Generally the street is divided down the middle of this one; based on 5 buys and holds each, the stock receives a moderate consensus rating of buy. (Check out the OHI stock forecast at TipRanks)
SFL Corporation (SFL)
For the last action, we will abandon REITs and switch to ocean transport. SFL Corporation is one of the largest ocean transport operators in the world, with a fleet of around 75 ships – the exact number may vary slightly as new ships are acquired or old ships are retired or sold – ranging in size from a whopping 160,000 -ton Suezmax cargo ships to tankers up to 57,000 tons bulk carriers. The company’s ships can carry almost any commodity imaginable, from bulk cargo to crude oil to finished cars. The vessels owned by SFL are operated on charters and the company has an average charter backlog of 2029.
Long-term fixed charters from ocean carriers are big business and brought in $165 million in 2Q12. As net income, SFL reported $57.4 million, or 45 cents per share. Of this net income, $13 million came from the sale of older vessels.
Investors should note that SFL’s vessels have a large charter backlog that will keep them operating for at least the next 7 years. The charter backlog totaled more than $3.7 billion.
We mentioned fleet turnover, another important factor for investors to consider, as it ensures that SFL operates a viable fleet of modern vessels. In the second quarter, the company sold two older VLCCs (very large crude carriers) and one container ship, while acquiring 4 new Suezmax tankers. The first of the new vessels is scheduled for delivery in Q3.
In Q2, SFL paid off its 74th consecutive quarterly dividend, a record of reliability that few companies can match. The payout was set at 23 cents per common share, or 92 cents on an annualized basis, and it had a steady yield of 8.9%. Investors should note that this is the fourth consecutive quarter in which the dividend has been increased.
DNB’s 5-star analyst Jorgen Lian is optimistic about this shipping company, seeing no particular downside. He wrote: “We believe there is significant long-term support for the dividend, without factoring in potential benefits from strengthening offshore markets. If we include our estimated earnings from West Hercules and West Linus, we think the potential for distributable cash flow could approach $0.50/share. We see strong upside potential, while the contract backlog supports the current valuation.”
Lian presents his view on Numbers with a price target of $13.50 and a Buy rating. Its price target suggests a one-year gain of 30%. (To watch Leanne’s record, Press here)
Some stocks slip under the radar, getting few analyst reviews despite solid performance, and that’s one thing. Lian’s is the only review currently registered for this stock, which is currently priced at $10.38. (See SFL stock forecast at TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.