TMRAY - These Are My Top-2 Non-Banking/Finance Picks

2023-04-18 05:11:06 ET

Summary

• Obviously, the main focus in the main market given their undervaluation is financial companies. However, in the case that we don't want to be investing in finance, here are alternatives.
• I maintain a wide coverage of not only US and Canadian stocks, but a large array of European and South American equities as well.
• As I see it, there are many opportunities for value investors in the market today - and here are 3 of the "main" ones that I invest in today.

Dear readers,

What we want to be looking at during these times are companies that couple undervaluation and quality. Obviously, there are a number of ways we can go about this. We can focus on specific sectors, or try and take a broader approach. Over the past few weeks, I have been a major proponent of investing in undervalued financials - and I've put my money where my mouth is. 70% of my invested capital in the last 4 weeks has gone towards Financials such as Lincoln National ( LNC ), Scotiabank ( BNS ), Toronto-Dominion ( TD ), JPMorgan ( JPM ), Bank of America ( BAC ), Truist ( TFC ), Intrum ( OTCPK:ITJTY ). All of these businesses are major stakes in my portfolio.

However, what do we do when all of these undervalued opportunities are essentially "invested in"?

That's what we will look at today.

Because there are appealing choices with triple-digit upside outside of this sector.

Here, I'm going to show you two sectors, and a few examples in each!

Currently undervalued sectors, and companies in those sectors

If you follow my writing to any extent you'll know that I'm a proponent of diversification. This goes to both sector and company diversification, as well as to currency/country. My current portfolio has a currency split of around 30.3% USD, 30.6% EUR, 20% SEK, 10% NOK, and some positions in JPY, GBP, and even a small amount of KRW (that's South Korean Won).

With regards to positions, this varies. A few years ago, I used to run a portfolio with around 80-90 positions. This is now down to around 40-50 main positions (meaning more than 0.3%). There is a lot of opinion and research here as to what is "optimal". All I can say is, pick what works for you, and this works for me.

My investing style involves putting money to work in companies that may not revert to their full potential for 3-4 years - so I don't want to overexpose myself to any one thing or one company. Diversifying like this usually means both less volatility, but also a lesser upside, but that's something I am fine with.

In this article, I have 2 sector picks with examples that I believe are currently excellent.

1. REITs

Obviously, REITs are very high on this list. That's not just because I've finally been able to really pump capital into Agree Realty ( ADC ) at a valuation I believe to be excellent. The company requires you to accept a premium for a net-lease REIT - but I believe this to be valid. I forecast ADC at around 20x P/FFO, which means that we have a double-digit 14% annualized upside, or 43% until 2025E, with a 4.3% monthly paid yield.

ADC has among sector-leading profitability in margins and currently trades at what can be considered "low" valuations for what is essentially a cheaper Realty Income.

Speaking of Realty Income ( O ), that's also undervalued here - and the only reason I didn't go more into that, is that I already am fully exposed in all my portfolios at a very attractive cost basis, currently giving me over 5.3% YoC. These are the ones I would "start" with.

But then we also have companies in the Office REIT space, that I've started putting serious capital in due to their massive punishment by the market. This includes companies like Highwoods Properties ( HIW ). These REITs currently trade as though half of their portfolios have become worthless. While I am not advocating overexposure to the office REIT sector, I am saying that quality names like HIW, Boston Properties ( BXP ), and Kilroy ( KRC ) or something like Alexandria Real Estate ( ARE ), are all companies I recently invested in.

Why?

Because even impairing the company's future valuations and cash flows significantly, there is a triple-digit upside to these companies and a yield that's over 5-6%. I disagree with the valuation that the market is currently assigning to most of these companies, but I absolutely love seeing these valuations.

Remember, when things are "up", most of us are saying "Oh man, I wish things were cheaper".

Well, things are cheap - are you happy?

Because you should be.

The money we invest here could double or triple over the long term - that's how I see it. I have been around for enough downturns and crashes that I know exactly how to act at this time - no matter how extensive a downturn or a recession we're in for.

So, my main current REIT picks are:

• Alexandria Real Estate
• Realty Income
• Agree Realty
• Highwood Properties
• Kilroy Realty Corp
• Boston Properties

All of these picks have significant and market-beating upside at comparatively low valuations or estimates, and that is what I look for. I will happily invest in all of them, and more, for as long as the downturn persists.

2. Industrials

Oh, Real Estate isn't everything - because we have undervalued industrials. I've been pushing money to work in many of these companies as well, expanding my exposure to several of them.

What companies am I talking about? Well, plenty of businesses have been pushed down for one reason or another. The main ones that come to mind to me are 3M ( MMM ) and Union Pacific ( UNP ) - for different reasons.

We know why 3M is down. There's a potential scandal brewing. I however belong to the camp that believes that the potential liability is well-covered by the current drop in share price and that both the upside, as well as the yield, make for a very appealing investment level. 3M typically trades at a significant premium - it's now down below 10x P/E.

Even just forecasting this company with an A rating at a 10-12x P/E, we still get a double-digit, yield-inclusive upside or 30-50% in less than 3 years. That is good enough for me, and that's why I invest, and maintain a cheap position in 3M with a close to 5.7% YoC.

I don't believe the pain is necessarily over - but that's fine with me. Time in the market is more important than market timing, and as long as I can argue that things are cheap, I'm happy to invest my capital into opportunities that I believe will reward me more than an index fund in the long run.

That's my goal, after all - I want to beat "free" index funds - if I don't do that, there is literally no point in stock-picking as I do it. Remember that also - if you listen to someone that doesn't at the very least beat index over the longer term - why are you listening to them?

I don't claim a wealth of knowledge compared to the larger funds, obviously - but I have the data to back up that I, over time, do exactly that. Again, this is mostly for me - because if I didn't beat the market, I would seriously reconsider doing individual investing.

Union Pacific is another company that's seen a significant decline in premiums due to some issues at the business. My view on UNP is simple - anytime it goes below $200, it's very interesting. That's why I started putting capital to work sub-$190/share, currently, already own 0.7% of my TPV in UNP - and I want to invest more. The upside, which I believe it will revert to, gives us the following potential.

Again, we're talking about A-rated companies that trade at a realistic double-digit upside for the next 2-3 years - and this is typically what I am looking for. We can also include companies like Nolato AB ( OTCPK:NLTBF ), a company I've written about to our subscribers before, and one I believe will outperform once things in the corresponding industries turn around - and you can currently get an almost 3.7% yield from it. However, I realize this is with a "niche" appeal - so look at it if you like. The same goes for German leaders like Knorr-Bremse ( OTCPK:KNRRY ).

Or, if you like, KION ( OTCPK:KIGRY ), which crashed even further after some issues, but is still, I believe a massive upside play once things normalize. KION is not going anywhere, and I am continuing to put money to work. These are quality companies with excellent upside, despite KION for instance being at BBB-. That does not make the company uninvestable for me, nor does the sub-1% yield. I have become a lot more welcoming towards these companies, as long as I "know" the company and have a high conviction about where it is going.

There are further upsides in the sector of industrials that you can take advantage of - here are some of the key ones that I currently see.

• 3M Company
• Union Pacific Corporation
• Knorr Bremse
• KION Group
• Cummins ( CMI )
• Tomra Systems ( OTCPK:TMRAY )
• Nolato

Other sectors are attractive as well - with key companies looking for undervaluation

You may start to see some similarities in the companies that I put my money in. They are out-of-favor businesses with good, or great fundamentals that I believe have a significant possibility for outperformance.

This is not limited to these two sectors - this is a method you can apply to the entire market. That is how, for instance, I found myself investing in Logitech ( LOGI ) and NetApp ( NTAP ), despite not many investors I follow having much interest in tech or IT at the time. Both of these companies are businesses I see as undervalued.

It's how I found myself going into the much-pressured Comcast ( CMCSA ), for its significant overall upside.

It's also why you've seen me invest in Johnson & Johnson ( JNJ ), Fresenius ( OTCPK:FSNUY ), and others as well. If you use a number of relatively simple tools and observe trends, you'll quickly see when a company is being punished. If you then spend some time looking into the company's fundamentals, financials, sector comps, historicals, and forecasts as well as trends, you'll start seeing common denominators for what someone like me might be interested in.

Of course, no method is foolproof. At times, the companies that I invest in take far longer than expected to revert - or worse, they do not revert to the level that I expect or forecast at all. For the time being, this has mostly happened to the smaller companies that I used to pick - as in, very small and speculative. This is no longer a direction I go. The most speculative investments I currently hold in my portfolio can be said to be Resurs Holding, a niche Swedish Bank, and Medical Properties Trust ( MPW ), which I don't view as that speculative, despite what's been going on in terms of the macro.

Wrapping Up

You'll find me holding a mixed portfolio with holdings across multiple sectors. What's more, you'll currently find me holding a larger-than-average cash position, given where we're expected to go.

As you can see, I'm still communications-heavy, though there are key positions there to harvest for profit, and push that into Real Estate, Finance, and Industrials. My double-digit 11.3% cash position is unusual for someone who is usually at 3-4%, and the reason for this is two-fold. First, given my higher focus on natively-traded cash-secured puts, I maintain a larger share of capital to that - secondly, I'm slowly allocating into my investments. I am in no real hurry to put money to work because I don't expect massive outperformance in the near term. Because the capital is being used as essential safety for my CSPs, that's something I view as yielding the average of my annualized CSP yield, which is currently around 12.34%.

My goal for this year and until mid-2024 is to get real estate up to 20-25%, move up in Industrials, as well in Healthcare, staples, utilities, and some more in oil/energy as key players become more attractive. Communications and basic materials are likely, in comparison, to go down in exposure. Not because I am massively selling or harvesting profit in them (yet, with some exceptions in communications like DTEGY), but due to a simple influx of new capital not being put to work in these (compared to others).

Control is the key for me here. I do not panic at downturns - I act rationally and in accordance with a pre-determined strategy based on what I view as "sound reasoning" in context to what we're seeing in the market.

This is my current strategy for my personal portfolio. My corporate portfolio uses a similar strategy with similar exposure, though it already has some of the larger Real estate and oil exposures, because it is still smaller and more "Nimble", whereas turning my main portfolio around is more akin to moving an oil tanker in a puddle.

The key similarity between them is that I try to not hold onto overvalued companies. My rotation over the past few months of Allianz ( OTCPK:ALIZY ) and Munich RE ( OTCPK:MURGY ) are key examples of these - they used to be almost 8.5% together in my portfolio. Now they are less than 0.6%, but at a superb sell, profit reflected in my track record showcased in this article.

That makes me more of an "active" investor than most of the conservative value investors you might follow.

I don't use ETFs. I don't use funds. I currently do not use bonds or prefs (though I may do so going forward, then I will trade individual instruments, not funds/ETFs.)

I pick individual things that match my strategy and hold them until they reach the potential I see them being able to reach. Then I rinse and repeat.

Questions?

Let me know!

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