WASHINGTON, January 22, 2014 – Wall Street has been thrashing about this holiday-shortened week a bit like Dr. Jekyll morphing into Mr. Hyde. The Dow Jones Industrials (DJI) and like-minded large caps have been getting pounded as they report earnings at or only slightly below expectations.
Meanwhile, the S&P 500 stocks have been flat to slightly up. All the averages seem to be in temporary stasis as they seek a bit of normalcy from 2013’s punch drunk pricing. Or maybe all the Kool-Aid investors were gulping down last year has finally run dry due to the reality of the ongoing, slow-motion Fed taper, rumored to be readying Act II late this month.
Often times, the Maven’s portfolio, constructed fairly conservatively, tracks the market’s movements in general. But this week has been strangely but positively different. We’ve been up sharply every day this week thus far (fingers crossed thru Friday’s close). Perhaps that’s been due to a few contrarian bets we took late in the year.
Most conspicuous among these trades have been our small but stalwart positions in REITs. These high-yielding, generally real estate-oriented stocks, many boasting dividends in excess of 10-12 percent early in 2013, were ruthlessly hammered when soon-to-be-ex-Fed-Chair Ben Bernanke floated the merest notion late last spring that the Fed might start backing off its current QE program which consisted mainly of buying up all the Fed paper in sight, to the tune of $85 billion in new indebtedness per month.
Even as Bernanke explained this notion, the bond market panicked and took a nosedive. REITs went right along for the sickening ride, since real estate appreciation is strongly linked in investors’ minds, mostly with good reason, with low interest rates, which generally expand the class and number of buyers.
REITs are most accurately valued in terms of the net value of their real estate holdings and/or mortgage instrument holdings, depending on the REIT’s objectives. REIT price-earnings ratios (PEs) are generally irrelevant, which is not true for most other types of stock investments. With the taper scare in the air, REIT net values did begin to erode, sometimes significantly, throughout the remainder of 2013, taking the stock prices down with them and, to some extent, those huge REIT yields as well, though not so much.
What ended up happening was that by mid-autumn, a great many high-quality bonds along with nearly every REIT in existence, had been grossly oversold, essentially due to an overreaction to the Fed’s announced, but once-delayed intentions which were put off by a few months due to the central bank’s fear of more Congressional budget fun and games.
The so-called taper is now in effect, cutting the Fed’s bond purchase target this month from $85 to $75 billion. Wall Street Journal reporter John Hilsenreth penned a page A-1 article yesterday hinting that the Fed was likely to chop the January figure by another $10 billion in February, bringing the program down to a paltry $65 billion in bond purchases, all of which, as always, are made by spending our unborn grandkids’ legacies. Since Hilsenreth is widely believed to be the unofficial Hermes for the Fed’s Bernanke-Zeus, the Street took out its displeasure yesterday and smacked the market down, largely aiming at the large industrial stocks but also at bigger players on the NASDAQ and those listed in the S&P 500 but to a lesser degree if at all.
However, REITs were only slightly nicked. And, lo and behold, REITs have risen a good 4-5 percent on average since the beginning of the year, making them, at least this month, among the best of our bevy of bounceback candidates—stocks sold for tax losses at the end of 2013 but so grossly oversold that they’d almost certainly bounce back up at least a few percent after December 31 when investors wanted to get back in.
REITs have combined with a couple of telecom stocks in our portfolios to outpace January’s frustratingly meandering market and give us positive returns thus far even as the market has remained persistently pissant over the same period. Plus—a big plus—the telecoms also pay swell dividends.
Bounceback candidate AT&T (stock symbol T) has performed poorly, largely due, we expect, to its current pricing battle with upstart T-Mobile (TMUS). Ironically, as many of you will recall, T once courted TMUS until the Obama administration’s reflexive anti-business boys shut down their impending wedding on anti-competitive grounds, which may actually have had some merit.
In any event, price wars are breaking out in wireless and broadband land, and the sheer audacity of T-Mobile’s aggressive tactics has smacked AT&T for nearly a 5 percent loss in January, even as non-dividend paying T-Mobile has soared over 30 percent in the same time period, goosed even further by yet another rumor of impending nuptials with telecom also-ran and now Softbank majority-owned Sprint (S).
Another delightful surprise has been smaller player Frontier (FTR). Wall Street has persisted in its knee-jerk attitude that Frontier is doomed due to its relatively recent acquisition of mainly wireline assets that telecom behemoth Verizon (VZ) no longer cared for. Traders have shorted the Dickens out of this stock since that deal closed, assuming, for no particular reason, that this would drive FTR into bankruptcy, unfairly linking FTR in advance to the fate of hapless Fairpoint Communications (FRP) which sought Chapter 11 bankruptcy not long after its grossly overpriced purchase of VZ assets.
But FTR is a much-better managed company that FRP ever was. While continuing to take hits in its wireline business—the same as all carriers—FTR has been exploiting the assets it purchased from VZ to aggressively expand wireless and high-speed Internet into heretofore underserved rural areas VZ had neglected and has been holding its own or growing slightly ever since it acquired VZ’s unwanted assets.
As a result, FTR, too, is up roughly 5 percent this year and is clearly capable of maintaining its outsized 8+ percent divided.
So, while the markets perform their own version of Hamlet’s dithering soliloquy, REITs and selected telecoms, hated through 2013’s second half, have been moving up or holding their own while traders hem and haw about what more Fed tapering actually means. It means nothing, actually, as long as you can uncover those stocks that at least for now simply don’t care.
We’ve already hinted at them. If you can find REITs or telecoms that you like and pick them up on days of severe market weakness, you’re likely to be happy with them, at least until this year’s sell-in-May signal happens. In fact, the dividends that most of these pay might even induce you to stay in them even as they, along with everything else in sight, endure the market’s traditional though inexplicable annual summer swoon.
Our best REIT bets right now are Two Harbors (TWO) and Pennymac (PMT) both of which we’re already in. An additional play here is the REIT ETF that trades under the symbol REM.
One problem with REITs is that they generate extra paperwork for you at tax time—paperwork that, unfortunately, tends to show up (legally) somewhat after the April 15 date when most people traditionally choose to file. REM handles that internally (which slightly nicks the yield), saving you all that trouble. Plus, being an ETF, REM also smoothes out the somewhat volatile price movements you encounter when holding individual REITs.
We’ve also mentioned our favorite telecoms. AT&T has been a stinker thus far in 2014, but it may currently be at its low point for the year. Add in its roughly 5.5 percent dividend, and you could find yourself in capital gain territory in this year’s second half.
Frontier (FTR) reports current earnings in the first week of February, so you may want to hold off to see what happens there. If numbers are flat to good, or even slightly down, this could clip the stock price a bit and provide a nice entry point. If earnings are better than expected, the stock will bounce nicely, and you might pick it up on the pullback that will likely follow.
TMUS is plateauing now at around $32 per share, a colossal gain for the Maven. However, it’s likely to sit there for now, moving up or down perhaps $2 either way until we get clarity on the strongly rumored Sprint takeover move, another one that would likely be blocked by the Administration in the end. That said, any offer would probably come in around $40 or perhaps higher, goosing TMUS further.
Until then, the stock will likely sit about where it is. Worse, if no offer materializes at all, it could lose 10 points in a hurry, although, allegedly, Dish Network (DISH) may also be interested in T-Mobile. In any event, the easy money has probably been made here, at least short term, and we sit on our TMUS nervously, wishing we had a crystal ball. So let’s call this one an interesting spec at this point.
Finally, a sleeper telecom, the non-dividend paying Alaska-based telecom General Communications (GNCMA) might be a good spec here. It’s recently bought a few TV stations, including two in Alaska’s state capitol city, Juneau, which could help smooth the company’s earnings curve in a fairly non-traditional way.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He currently owns shares of T, FTR, GNCMA, PMT, and TWO.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk. Caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.Click here for reuse options!
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