Don't Sweat It: 3 Strong Buy Labor Day Picks

seekingalpha2021-09-06

Summary Labor Day should be stress-free and investors should not sweat too much. That's why I decided to do all of the heavy-lifting and provide you with a list of 3 Strong Buys. So, don’t sweat it ...

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2021koon
2021-09-07
2021koon
Seriously looking into it!
Imgoh
2021-09-07
Imgoh
Happy Labor Day
Sheryl04
2021-09-06
Sheryl04
Pls like
- Adollar:
  Great picks
Seuna
2021-09-06
Seuna
Like pls

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And during this time, many consumers take advantage of the long Labor Day weekend to go bargain shopping.\nAnd with that in mind, today's article is centered on the concept of value investing. As Benjamin Graham explained in Security Analysis:\n\nIn security analysis the prime stress is laid upon protection against untoward (unfortunate) events.\n\nHaving experienced harsh financial hardships in his youth, Graham grasped the danger of risking capital, recognizing that value investors have a primary goal to preserve capital.\nOn Labor Day especially, all of us recognize that we work hard for our money so it's extremely critical to always protect principal. Graham once said:\n\nAdversity is bitter, but its uses may be sweet. Our loss was great, but in the end we could count great compensations.\n\nKey words: \"great compensations\".\nHow so?\nWhenever the financial markets fail to fully incorporate fundamental values into stock prices, an investor's margin of safety is high, and that is the so-called margin of safety concept.\nWarren Buffett, Graham's student, explained it like this (at Columbia Business School in 1984 for the 50th anniversary commemoration if the original Security Analysis):\n\nYou do not cut it close. That is what Ben Graham meant by having a margin of safety. You don't try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pund tricks across it. And that same principle works in investing.\n\nAs a financial writer, I see many articles written by others on the concept of \"chasing yield\".\nAnd who doesn't like yield?\nI do as much as anyone else, and from time to time I'll even nibble on shares likeNew Residential(NYSE:NRZ)- now yielding 9.1%.\nBut the key word here is \"nibble\"...\nI've been a real estate investor now for over 30 years and during these decades I've learned some valuable lessons on the subject of \"sucker yields\" and \"value traps\" and not chasing yield.\nAnd like Graham, these lessons in life have forced me to become a better investor with a serious understanding for money and an extreme conservatism in all of my spending and investing habits.\nAs my wife will tell you, I'm a quintessential bargain hunter and unless I see value in the underlying business, I have zero interest in putting my hard-earned capital to work.\nSimply put, I work hard for my money… and because I have lost millions of dollars (as a real estate developer) I have no desire to chase yield, or what I often refer to as the \"shiny toy syndrome\".\nIn fact, because of my experience - as a developer and analyst - I have developed conservative habits that have given me a massive advantage because I have developed a brand (and book) around Intelligent REIT Investing. In the new book I explain:\n\nMy main goal is to help educate readers by utilizing my experience in leasing, finance, development, and capital markets so they can better build their own wealth by owing shares in real estate investment trusts. As you may have already noticed, I titled The Intelligent REIT Investor after Graham's The Intelligent Investor. This was done on purpose to boldly highlight the link between valuation and real estate, which you now have access to.\n\nSo today, on Labor Day, I don't want anyone to work too hard or even break a sweat, so I decided to provide readers with a list of 3 Strong Buys.\nRecognizing of course that to be qualified as a Strong Buy in the first place the company must be cheap enough to buy with quantifiable catalysts that support shares to return a minimum of 25% over the next 12 months.\nBloomberg Rent Sounds Good to Me\nOur first Strong Buy pick is Alexander's (ALX), an externally managed REIT that owns a trophy asset known as 731 Lexington Avenue in New York City. This a 1.3-million square foot multi-use building contains 885,000 and 174,000 net rentable square feet of office and retail space, respectively.\nBloomberg, L.P. is the largest tenant and occupies all of the office space and the Home Depot (NYSE:HD), The Container Store (NYSE:TCS), and Hennes & Mauritz (OTCPK:HNNMY) are the primary retail tenants.\nBloomberg represents a substantial portion of ALX's revenues, accounting for around 45% and no other tenant accounts for more than 10% of the company's total revenues. Bloomberg pays ALX around $98.38 per square foot, and the primary lease expires in 2029.\nOther properties owned by ALX include Rego Park I, a 343,000-square foot shopping center located in Queens and a 50,000-square foot Burlington Coat Factory (NYSE:BURL); Rego Park II, a 609,000-square foot shopping center in Queens (anchored by a 145,000-square foot Costco (NASDAQ:COST), a 133,000-square foot Kohl's (NYSE:KSS); and a 30-acre ground lease to IKEA in New Jersey; and a 167,000-square foot building leased to New World Mall.\nBack in May 2021EG Capital put together a Net Asset Value modelfor ALX that I thought was fairly conservative. The analyst said:\n\nTotaling up the asset values we get ~$2 billion worth of net assets. With the current market cap of $1.4 billion, we're able to buy this dollar bill for 70 cents.\n\nHe went on to say:\n\nThe downside here seems pretty limited since ALX probably won't run into any liquidity problems any time soon; on top of that, as you're waiting for the price to appreciate, you get to snack on a 6.8% yield.\n\nI agree with the author, and we see much more upside than downside, with ALX shares now trading at $257.94 per share with a dividend yield of 7.0%. The P/FFO multiple is 14.4x compared with the 5-year average of 18.3x.\nAlthough the ground level retail is concerning, the exposure to high quality tenants like Home Depot, Kohl's and IKEA help me sleep well at night. And I don't see Bloomberg leaving anytime soon (lease expires in 2029 with rent escalations of ~11% every 4 years).\n\nSource: FAST Graphs\nSeek Alpha by Owning Omega\nThe next Labor Day Strong Buy isOmega Healthcare Investors(OHI), a skilled nursing REIT that has managed to increase its dividend for an impressive 17 years in a row. Although shares are seemingly cheap these days, OHI has always demonstrated strict discipline by successfully navigating economic conditions.\nThis bullish sentiment for OHI is correlated to its quality balance sheet and diversification attributes. By leveraging its existing 70 operator relationships OHI has been able to generate consistent internal and external growth which has resulted in significant scale (the largest SNF-focused REIT in the healthcare sector).\nOHI uses its credit facility to make acquisitions and replenish availability with long-term debt and equity issuances. This has enabled the company to maintain strict financial discipline such as a debt to adjusted proforma earnings before interest, taxes, depreciation, and amortization (EBITDA) of 5.12x and just 5.6% in secured debt with no material debt maturities until 2023.\nMore importantly, OHI has done a good job of reducing its payout ratios. As of the latest quarter, its AFFO was 78.9% and its funds available for distribution (\"FAD\") was 83.2%.\nAnalysts are only modeling modest growth in 2022 and 2023 of around 2%. But in terms of valuation, OHI has one of the cheapest multiples in the healthcare sector. It's currently 10.3x compared with around 12.6x over the last four years.\nRisks are obvious - labor issues and Delta variant risks; however, OHI has a proven its ability to handle troubled assets and is expected to double in size in the next 10 years. Shares are yielding 7.9% right now, and our annualized total return forecast is over 20%.\n\nSource: FAST Graphs\nLet the Good Times Roll\nFinally, the last Strong Buy pick isVICI Properties(VICI), a gaming REIT thatwe first spoke of back in 2018:\n\nVICI has the lowest payout ratio, and while the dividend is lower than the peers, we believe that this REIT has the best potential to grow its dividend.\n\nThese days VICI pays out $1.32 per shares (annualized) and dividend growth has averaged 11% over the past three years. And given the exciting growth prospects we expect VICI to continue to boost its dividend in the future.\nVICI announced it was merging withMGM Growth Properties(MGP) in a $17.2 billion deal that is seen as a credit positive from rating agencies. They like that VICI will become more diversified with some of the strongest gaming operators in the country.\nIn fact, experiential industries are booming right now, in an environment in which VICI will soon own 43 casinos - along with 58,000 hotel rooms. When that happens, VICI's cost of capital will fall from a decent 4.5% to a much better 4%.\nThis will allow it to acquire even higher-quality properties in the future with similar levels of profitability.\nDays ago VICI said it hadentered into a new dealwith the Eastern Band of Cherokee Indians' (\"EBCI\") acquisition of the operations of Caesars Southern Indiana. Initial total annual rent under the lease with EBCI is $32.5 million and the lease has an initial term of 15 years, with four 5-year tenant renewal options.\nVICI, EBCI and Caesars have entered into a right of first refusal for VICI on the real property associated with the development of a new casino resort in Danville, Virginia. Here's a rendering of the new project that is expected to generate $500 million of new value.\n\nSource\nAnd it's not just the growth that excites me about VICI, it's the valuation.\nMany know that I've been bullish with VICI since the IPO, but what's exciting to see is how the management team is using its capital markets discipline and vast contacts to generate more reliable and predictable cash flow.\nVICI has generated AFFO per share growth of around 12% (over the last few years) and is likely to maintain its growth profile with deals like MGP and Venetian.\nWe also expect VICI to pursue non-gaming deals like therecently announced$79.5 million Wolf Lodge investment (interest rate of 8%) and \"up to a total of $300 million of mezzanine financing for the development and construction of Great Wolf's domestic andinternational indoor water park resort pipeline\".\nKey word here: \"International\"\nVICI is now trading at $32.03 per share with a P/AFFO multiple of 17.9x and a dividend yield of 4.5%. We believe shares remain cheap today when you compare them to other blue-chip names likeRealty Income(O) andAgree Realty(ADC) that trade at an average multiple of 21.0x.\nI plan to visit Las Vegas in a week (key note at The MoneyShow) where I will conduct a \"boots on the ground\" video for iREIT on Alpha members. While there I can obtain firsthand knowledge of the demand for leisure travel that remains robust despite Delta concerns.\n\nSource: FAST Graphs\nHappy Labor Day!\nFinally, I would like to wish everyone a terrific Labor Day, recognizing that all of us are working hard to either maintain or grow wealth.\nWhile it is impossible to eliminate all risks, by selecting high quality stocks with a definitive margin of safety, one can greatly reduce risk.\nI plan to write an article later this week on the subject of \"yield chasing\" with the hopes that I can steer investors away from the \"too good to be true\" stocks and to instead allocate capital to:\n\n\"An investment operation is one which, upon thorough analysis, promises safety of principal and satisfactory return.\" (Graham)\n\nRemember, it only takes a few large losses to destroy your overall investment performance, even if many other investments prove successful.\nNow, don't sweat it and enjoy your day off!\nAuthor's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. 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