Government Shutdown Looms Large Over The Market

Includes: EDR, EQM, XHB
by: Bret Jensen

From the "no one should be surprised" department ...

It looks like it will be a volatile day in the market to start the trading week as governments across the globe throw temper tantrums. The Italian government faces collapse as legislators fight about the disposition of Silvio Berlusconi and his myriad problems. Readers that follow my daily columns on the TheStreet know that I have been predicting that some of these Southern Europe "cockroaches" would come back into the light after the German elections were concluded. Expect more volatility from Europe in the fourth quarter.

Domestically, the two parties continue to throw spitballs at each other. Both parties are in difficult positions. The Republicans in Congress need to hold the line and try to do something about the budget deficit and the Affordable Care Act or face the wrath of the Tea Party in primaries. The party also is split on what the next steps are in the budget and debt limit talks.

The president seems content to welcome this fight as he rightly calculates that the press will blame the other party for any shutdown and it could bolster his falling popularity numbers. "Negotiating" also appears to be reserved only for despots (Syria, Russia, Iran) and not the domestic opposition party. He appears perfectly willing to play Federal Reserve chairman and let his successor to figure out how to deal with a growing debt, deficit and entitlement spending mess.

High yield sectors like REITs and MLPs should outperform the overall market as investors follow a "flight to quality" and continue to drive 10 year government debt yields lower. I have said for over a month that these high yield areas were attractive as neither job or economic growth were strong enough to support rates above 3% rates for long. In addition to some of these plays (I, II, III) I have highlighted in previous SeekingAlpha columns, here are two more high yielding plays income investors should consider for purchase on any near term pullback.

Education Realty Trust (NYSE:EDR) is one of America's largest owners, developers and managers of collegiate housing. The REIT owns or manages 67 communities in 24 states with more than 37,000 beds. Insiders have been active buyers of the stock recently. They have bought over 35,000 new shares in the last month or two as the stock has declined ~20% as interest rates moved up from ~1.6% to 3% recently.

Same-community pre-leasing occupancy was announced recently standing at 94.1%, a 300 basis point improvement over the prior year. The company also noted it is seeing 2% rent increases across the communities it owns and manages. The shares yield 4.8% after the company bumped its dividend payout 10% earlier this summer.

The company has more than doubled operating cash flow since the end of FY2010 and has a solid balance sheet. New developments and organic growth is powering over 25% revenue gains this fiscal year and analysts believe another ~20% sales gain is in store for FY2014. The nine analysts that cover the shares have a $11 price target on EDR, ~20% above its current stock price.

EQT Midstream Partners, LP (NYSE:EQM) provides natural gas transmission, storage, and gathering services in Pennsylvania and West Virginia. It also owns, operates, acquires, and develops midstream assets in the Appalachian Basin. The shares only yield 3.3% currently but this should increase substantially in future years due to the company's growth prospects. The company is tracking to better than 35% revenue growth this fiscal year and analysts' project more than 20% sales increases in FY2014. The stock has a very low five year projected PEG (.61) for an income play.

Earnings look like they will book a better than 40% increase Y/Y for this fiscal year. The median price target by the ten analysts that cover the stock is $54 a share, implying some capital appreciation on top of a decent yield and future dividend growth.

The market is likely to have several weeks of turmoil on the back of Washington histrionics. However, the most likely outcome is another round of "kick the can" down the road. For patient, long term income investors; some good entry points lie ahead.

One last thing, investors should avoid the homebuilding stocks until this latest confrontation in D.C. is resolved. The SPDR S&P Homebuilders (NYSEARCA:XHB) dropped more than 20% during the debt limit debacle in 2011 and is likely to be hit hard again if a similar scenario plays out.

Disclosure: I am long EDR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.