Thanks To Brexit, This Sector Is Making A Huge Comeback

| About: Vanguard REIT (VNQ)

By Jonathan Rodriguez

It's been just over two weeks since the EU referendum vote, and investors are still dumping stocks as fast as their fingers can sell them.

Since the vote, the S&P 500 Index (NYSEARCA:SPY) has declined 1%. But spot gold is up 9%, and the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) has added another 8% over the same period. In fact, TLT is now trading at an all-time high as fear grips the masses.

But the full-blown disruption of the market has created a huge opportunity in a segment where few people are looking right now.

Cruising in the Slow Lane

Before the pivotal referendum vote, the financial sector was on fire with the prospect of rising interest rates.

From its February bottom, the S&P 500 financial sector (NYSEARCA:XLF), outperformed the market for three consecutive months. Financials gained as much as 21% before the vote.

But the UK's vote to leave the European Union took much of the market by surprise. And now, the Fed will likely hit the brakes on rate hikes for the rest of the year.

The odds of a hike at any point this year are now less than 10%.

As you may know, banks' profits - and their stock prices - have lagged behind the broader market during the near-zero interest rate era (ZIRP). And the prospect of low rates for longer will continue to weigh heavily on the already battered sector.

However, low rates do favor one crucial segment of the financial stock universe.

Low Rates, High Profits

Real estate investment trusts, or REITS, benefit greatly from low rates.

As you know, these companies buy up revenue-generating real estate, often using leverage.

When rates are low, REITs make out like bandits taking advantage of cheap financing. And they can afford to reward shareholders with fat dividend payouts.

Since the start of the bull market, the Dow Jones U.S. Select REIT Total Return Index (INDEXDJX:DWRTF) has soared 479%. That's more than twice the total return of the Dow Jones Industrial Average.

The caveat to this market segment is that it is sensitive to even the suggestion of rate hikes. But thanks to Brexit, we may not see another interest rate hike for the next twelve months - or more!

This makes the current pullback the perfect opportunity to dive into the sector. And I've got just the name to get you started...

The Diamond in the Rough

DiamondRock Hospitality Co. (NYSE:DRH) is a lodging-focused real-estate investment trust.

Founded in 2004 with headquarters in Bethesda, Maryland, the company owns approximately 30 hotels and resorts in North America, with a total of nearly 11,000 guest rooms.

Its properties are managed by some of the biggest names in the hospitality business: Marriot International Inc. (NYSE:MAR), Starwood Hotels & Resorts Worldwide Inc. (HOT), and Hilton Worldwide Holdings (NYSE:HLT).

The company reported third-quarter financials on July 7 that exceeded Wall Street earnings estimates by a whopping 68%.

Over the last five years, the company has increased funds from operations by 21% - twice the median of its peers. And it currently sports a 5.5% yield - more than twice the S&P 500's 2.54% yield, and four times the yield of the US 10-year Treasury bonds.

On a forward earnings basis, the shares are trading at a 52% discount to their 10-year average.

Most importantly, the company is shielded from the chaos unfolding overseas.

As I noted last week, post-Brexit currency fluctuations will wreak havoc on international revenue through the end of the year.

But the overwhelming majority of American small-cap companies book their revenue here in the US.

DiamondRock, which sports a market cap of $1.8 billion, is well insulated from these effects. All of its revenue, which has grown at an average clip of 12% over the last five years, is generated in the US or its territories.

Best of all, its shares are moving in an ascending triangle pattern, which often precedes a breakout.

Despite rocky trade over the last few weeks, the shares have stayed on their seven-month uptrend channel.

Bottom line: With rates low and international fears high, domestically-focused REITs are one of the market's juiciest opportunities right now.

Consider adding this high-income "rock" to your portfolio while it's still cheap.

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