Four Stocks Set to Soar After the Latest Inflation Numbers

This week I want to take a comprehensive look at the current market landscape and some exciting investment opportunities, particularly in real estate and banking sectors.

A few weeks ago, we saw a promising inflation report, showing the lowest core increase in over three years and a decrease in the headline number month-over-month. While this is undoubtedly positive news, it’s important to be cautious against excessive optimism. The decrease was largely driven by lower gasoline and rent prices, which are nice but not necessarily sustainable.

Regarding Federal Reserve policy, Chair Powell remained non-committal in his recent testimony, frequently using the phrase “data-dependent.” While the market is anticipating rate cuts in September and December, these predictions have often been inaccurate. If pressed for a prediction, I will go with Torsten Slok‘s view. The economist for Apollo Global has been suggesting no cuts this year, and he was the first lonely voice in the wilderness ot suggest that this was going to be the case.

In his mid-year update, slot pointed out that no matter how pleasing the day-to-day news may be, there are five significant factors in play that will make it difficult for inflation to recede permanently.

Deglobalization, Energy transition, Increased defense spending, the government debt pipeline, and the fiscal policy of the United States are all inflationary forces on their own. It’s crucial to be aware of these potential risks in the market.

All four are in play, according to Slok.

Movin’ on up!: I am not an economist and have to rely on my all-standard buying of what is cheap. Because of that, I have been bullish on real estate and bank stocks for two years, and that position is paying off.

I am particularly optimistic about Sun Belt REITs and have recently taken an aggressive stance on office REITs, especially Manhattan Class A office space. The preferred stocks of companies like SL Green and Vornado are trading at attractive discounts to par value.

I am extremely bullish on mortgages.

For those looking for steady cash flow and low volatility, the Simplify Mortgage-backed security ETF (MTBA) offers a solid 6% yield, making it an excellent option for parking cash.

For high yield and total return, I prefer the mortgage REITS.

The agency side of this market lives on the spread, and implicit or outright government greatness removes all credit risk. Spreads have tightened but are still at a historically high level.

Given the limited participation of banks and the exit of the Fed as a buyer, there is an extraordinary opportunity for agency REITs to step into the vacuum in the mortgage-backed market, and this is giving us huge yield and high total returns potential.

What I Like: My top picks in this space are Annaly (NLY) and AGNC Investment Corp (AGNC). Both are poised for potential book value increases and are maintaining stable spreads, supporting their impressive dividend yields of 13% and 14%, respectively.

Hybrid mortgage REITs primarily deal with non-conforming loans that do not qualify for agency guarantees. These often include jumbo loans, non-QM (non-qualified mortgage) loans, and other specialized mortgage products. The key differentiator for these REITs is, indeed, their credit management.

In the hybrid REIT space, Redwood Trust (RWT) stands out with its 9.34% yield. They specialize in non-agency mortgages, including jumbo loans and business-purpose loans. Their experienced management team, focus on credit quality, and innovative approach make them well-positioned in the current market.

For a lot of reasons, including stricter regulations, rising home prices, and the absence of subprime and near-prime lending, credit is not a huge issue for the top-tier hybrids right now.

One thing I really like about Redwood is its experience. These guys have been around the block. I have owned this thing off and on for decades now, and it has weathered some serious storms in the mortgage market. Redwood has a management team that knows how to navigate tough times, and that is crucial in this business.

Another interesting player is Rithm Capital (formerly New Residential) (RITM), which offers a 9% dividend yield. Its diverse business model includes a mortgage bank that it may spin-off, which could be a value-creating move.

We remain bullish on energy, especially with natural gas prices coming down. Our focus is on exploration and production companies with significant natural gas operations, as well as servicing companies working with natural gas firms.

We are seeing increased M&A activity in small banks, with credit unions emerging as significant buyers due to their tax advantages. This trend is creating interesting arbitrage opportunities.

Credit Unions are paying cash in these deals, and there is often a gap between the current price and closing value worth exploiting.

I am closely watching residential real estate brokers and servicing companies, including Anywhere Homes (HOUS), Re/Max (RMAX), Douglas Elliman (DOUG), Compass Group (COMP), and Redfin (RDFN). The Department of Justice’s reopening of the commission case could lead to significant industry changes.

There will be winners and losers from the changes that the lawsuits and DOJ investigation will force the real estate industry to undergo. While I highly doubt that consumers, especially first-time buyers, will be on the winner’s list, the stocks of the companies that get on the right side of this will deliver enormous gains.

The real estate, mortgage, and lending sectors are currently out of favor, which I believe presents a prime opportunity for investors. Being a landlord for tech companies and other businesses is likely to be more profitable than owning stocks trading at high multiples.

These investments can generate substantial profits with potentially less volatility and risk compared to the broader stock market. They offer attractive cash flows and could outperform in what might be a subpar decade for overall stock market returns following a 14-year bull run.

Remember, being contrarian when sectors are out of favor can lead to significant long-term gains.

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Image credit to Midjourney