Bullish Pattern On Omega Healthcare Investors Indicates Higher Prices Ahead

| About: Omega Healthcare (OHI)

Summary

Omega Health has a powerful combination of a high yield and good dividend growth.

With 15 years of dividend growth, Omega Health investors get paid to sit and wait.

On top of that, the stock recently confirmed a bullish pattern on its daily chart.

For dividend growth investors looking at REITs as a source of growth, you could do worse than to consider Omega Health Investors (OHI). Currently yielding nearly 7.4%, the company is a dividend machine - with a decade and a half of year over year dividend growth and quarterly increases over the last 5 years, OHI has given investors reason to stick with the health care REIT.

There have recently been flurry of articles published on SA about Omega Health Investors. I won't rehash them here. Most have been bullish, focusing on the demographics of the United States and Europe, but Michael Boyd's recent article lays out the bearish case. (Take a look also at The Knife Catcher's article for a rewrite of The Beatles' song Let It Be as a tribute to OHI.)

Simply put, OHI's business focuses on health care properties. They have a large portfolio with nearly 1,000 properties across the US and the UK and are the largest REIT focused on skilled nursing facilities.

The powerful combination of above average yield and decent dividend growth makes the REIT appealing to income investors. As noted above, for the last 5 years OHI has increased its payout each quarter. While the individual increases of a penny or two don't seem like much, the cumulative effect is powerful. In the 5 years ending in 2016, OHI's average dividend growth rate was 8.8%; over the last 10 years, the dividend growth has averaged 9.4% annually.

Regardless of an excellent dividend growth history, it is possible to buy a company at the wrong time. I use technical analysis to help identify lower-risk buy points. OHI recently confirmed a bullish double bottom pattern on its daily chart which I believe represents a low risk entry point for the healthcare REIT.

The Double Bottom Pattern

The double bottom pattern is a bullish pattern that can form on a chart of any timescale. The pattern looks like a "W", with the stock trending downward, bouncing to an intermediate peak, reversing downward again to a second bottom, and then bouncing again to above the prior intermediate peak. For certain double bottom patterns, the 2nd bottom will be slightly below the first bottom, which has the effect of scaring out investors who sell once the first bottom is broken.

The pattern is confirmed on a break above the intermediate peak (the middle of the "W").

OHI has formed and confirmed a bullish double bottom pattern as I note on the chart below:

Bullish Double Bottom Pattern on OHI

Note that the second bottom in late May undercut the first bottom in early May. On Friday, OHI broke above the midpoint of the "W", confirming the bullish pattern. Even better, it did it on above average volume, demonstrating investor enthusiasm. The only concern that I have is the oversold signals on the Relative Strength Index (>70) and on the Full Stochastics (>80). That, in conjunction with the resistance around 34.50 indicates a possibility for the stock to stall or even pullback to support at the "W" midpoint.

One way to play this is to take an initial partial position now that the pattern has confirmed, and add to it if the stock breaks above the prior high at 34.50. While I will likely do this, you need to invest at your comfort level.

What Could Go Wrong

Mr. Market has an annoying habit of maximizing investors' pain. Any pullback below the midpoint of the "W" pattern at 33.75 indicates that the breakout has failed. There's always a possibility of a "bull trap" like this; you should be aware of the possibility and understand the risks.

The bright side is that if the stock ends up range-bound, investors will be rewarded (to the tune of a 7.4% yield) for sitting tight and waiting.

Summary

As a health care REIT, OHI has demographics on its side. With a bullish pattern confirmed, investors are likely to be rewarded with capital gains but even if the stock stalls, the outsized yield and good dividend growth means investors can sit and collect a growing dividend.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OHI over the next 72 hours.

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.

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