2023-12-28 00:15:33 ET
Summary
- I invested mostly in treasuries this year due to rate hikes. In 2024, I'll probably put more money in stocks.
- Companies that are indebted and/or richly valued are expected to benefit from rate cuts, while low-quality companies may not be saved.
- To profit off the Fed's expected rate cuts, you need to pick high-quality stocks.
- In this article, I reveal two high-yield stocks I'm buying in 2024 and a third I'm seriously considering.
A new year means a new market. And in 2024, I’m eager to keep buying stocks. This year, I invested more money in term deposits than stocks, due to the rise in interest rates we’d observed in 2022. With the Fed forecasting 75 basis points worth of cuts for 2024, there’s reason to believe that stocks will rally. Treasuries will also rally in such a scenario but it’s stocks that have the most to gain, because they currently trade at high multiples , and such multiples become more justifiable as interest rates fall. So, 2024–at least the early months of it–is looking like a relatively good time to be long equities.
With that said, not all equities are created equal. Companies that are indebted and/or richly valued will benefit from rate cuts, as lower interest rates reduce the former’s costs, and increase the latter’s fair value in discounted cash flow models. Heck, even banks might benefit. Normally we think of high interest rates as a positive for banks, because banks earn more profit as rates rise–provided they rise in parallel along the yield curve–but this year investors are more concerned about high rates wrecking the banks’ bond portfolios. Think of how Bank of America ( BAC ) has traded inversely to treasury yields ever since its $132 billion unrealized loss was revealed.
So every broad sector should benefit from rate cuts. But companies that are simply of low quality won’t be saved. If a company has an ever-rising number of competitors forcing it to cut prices, low rates won’t save it. This is particularly the case with many high-yield names, some of which have been justifiably beaten down. I love a high yield as much as the next person, but I won’t chase one if it will come at the expense of total return. In this article, I’ll explore two high-yield stocks I’m almost certainly buying next year and one I have my eyes on.
BUYING: TD Bank
The Toronto-Dominion Bank (TD)(TD:CA) is a Canadian bank stock with a 4.8% dividend yield . Its dividend has risen 8.05% CAGR over the last five years. Its revenue is up a little this year, although earnings are down 40% thanks to a fine and some M&A termination costs.
TD hasn’t had the best year in 2023. Its First Horizon ( FHN ) deal was cancelled, it got sued by a hedge fund over said cancellation, and it got investigated by the DOJ over money laundering . Nevertheless, I will buy it on the dip if it goes below $82. At that level, TD would be trading below 10 times earnings, which is about where Bank of America is. I was enthusiastically buying Bank of America when it fell below 10 times earnings this year, I’d do the same with TD Bank.
TD has been a mainstay of my portfolio for a long time. I still hold something like 2% of my portfolio in TD, but I sold a very large portion of my position when I heard that an antitrust investigation was being conducted by the DoJ. If TD beats the accusations it’s being investigated for, then I’ll probably buy some more shares. Even if it takes a fine and declines in price a lot, I’ll buy it should it get cheap enough.
How are TD’s fundamentals? Pretty good. It has a 22% net margin , a 9.6% ROE, a 6.2% five-year CAGR revenue growth rate, and barely any unrealized treasury losses. It trades at 10.6 times earnings, 3.15 times sales, and 1.4 times book value. Overall, a profitable company and a relatively cheap stock.
Oaktree Specialty Lending
Oaktree Specialty Lending ( OCSL ) is an ultra-high yield stock I’ve covered in the past. I have a small position in it; should it remain available for prices near $20, I’ll buy more next year.
Oaktree Specialty Lending is a business development company (“BDC”) that loans money out to struggling enterprises. That might sound risky, but 86% of its loans are first or second lien, so it is protected by collateral.
Oaktree’s fundamentals are unbelievably good. It has a 31% net margin , an 8.5% return on equity, a 44% TTM revenue growth rate, and a 239% TTM earnings growth rate. On top of that, its five-year CAGR revenue growth rate is 22%, so the last 12 months were no fluke.
As for the valuation, OCSL is quite cheap, trading at :
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8.31 times earnings.
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3.9 times sales.
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1.05 times book value.
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6.93 times operating cash flow.
EYING: TORM PLC
TORM PLC ( TRMD ) is another high-yielder with a 22.4% trailing yield. Don’t read too much into that monster yield: dividends get cut very frequently in the shipping industry, as it’s very cyclical. A good recent example of this is ZIM Integrated Shippin g ( ZIM ), which was once a high-yielder but is now a no-yielder .
Nevertheless, TRMD looks like a great stock at the right price.
This year, Torm is performing extremely well. It has a shockingly high 44% net margin , a 46% return on equity, 33% TTM sales growth , and 103% TTM earnings growth. Also, it’s dirt cheap, trading at the following multiples :
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3.95 times earnings.
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4.36 times forward earnings.
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1.7 times sales.
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3.18 times cash flow.
Absurdly cheap. Nevertheless, I haven’t bought any TRMD stock yet, and I’m hoping to see $20 before I buy it. The reason is that shipping is cyclical. Shipping rates are influenced by many factors, including:
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Crude oil prices. As crude oil prices rise, tankers can charge higher rates to their increasingly cash-rich customers.
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Crude oil volumes. The more oil is being sold, the higher the rates tankers can charge.
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Availability of tankers. The more customers have to choose from, the lower the rates.
As you can see, it’s much more than just oil prices. If prices are healthy but volumes are low, then freight rates may still drop. This year, we’re seeing over a million fewer barrels per day coming out of Saudi Arabia compared to last year. So, I’m expecting TRMD’s earnings to dip a bit.
The Bottom Line
Rate cuts are seen as being good for stocks, and more often than not, they are. Reducing borrowing costs and improving discounted cash flow valuations, they can line investors’ pockets. Still, you have to be careful. Buy shares in a dying enterprise, and don’t be surprised to see those shares tank even amid falling rates. The three stocks mentioned in this article should avoid that fate.
For further details see:
2 High Yielders I'm Buying In 2024, And I'm Eyeing One