- Many investors are married to the U.S. equity market.
- They either invest in U.S. dividend stocks (yielding extremely low right now) or high tech growth stocks (priced at all time highs).
- We prefer to find under-the-radar opportunities with high yield and upside potential. We offer 2 such examples below.
- Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »
For dividend investors or value investors, it’s an increasingly difficult environment to find deals as dividend stocks continue to rip higher:
However, even though the broader market is very richly valued, there always are pockets of value to be found.
Some of our favorite pockets of value right now include:
- Businesses Punished By COVID: Believe it or not, short-term pandemic fears are still impacting some stocks, many of which have not even come back to their pre-pandemic prices yet.
- Boring Businesses: Even at all-time highs, investors are still chasing sexy tech and growth names. There’s certainly nothing wrong with innovation, but this exact mindset has actually made boring yet essential infrastructure businesses a much better value.
- Foreign and Emerging Countries: Many investors are heavily concentrated in US equities. If you learn how to navigate the withholding tax hurdles, there's still great opportunity and diversification in other markets around the world.
Furthermore, these opportunities pay yields well above the S&P’s (SPY) measly 1.4%. You can see how this portfolio compares in the graph below:
That said, it’s not enough to just identify broader subsectors of the market that deserve attention. Below, we go one step further and show you some of our stand-out stocks that fit into our current investment themes:
Telefonica - A Foreign Telecom Powerhouse
Most investors haven’t heard of Telefonica (TEF) even though the company is currently Spain’s largest telecom company. Even more impressive - the company is growing globally. Telefonica is seeing rapid growth in:
- The UK
Of course, every dividend investor is aware of AT&T (T). But for that name-brand recognition, you’re also paying a premium, even with the lackluster performance the company has had for the past years.
Furthermore, AT&T has alarming levels of debt. When the valuation is adjusted for the company’s leverage, it’s actually trading near all-time highs:
This kind of insight only becomes clear when we use EV/EBITDA. To the untrained eye, AT&T appears cheap, until you take a closer look. It’s unfortunately a classic value trap.
If we use this same methodology to value Telefonica, the company is extremely cheap compared to AT&T:
But the company also has other tailwinds working in its favor:
While many businesses today are getting extremely complicated and making haphazard acquisitions just to stay alive (AT&T has certainly been a victim of that), Telefonica is trimming the fat and simplifying its operations. Even still, they continue to announce impressive deals. Management recently finalized a sale of their towers to the renowned American Tower (AMT).
All around, the company is reducing unnecessary complexities and doubling down on the operations that actually bring in robust cash flow.
Like AT&T, the company does have debt, but it's prioritizing paying it off. The fact that they are aware of this and are aggressively working to improve the balance sheet is refreshing.
Overall, the financials are in a good place, with an incredible ~20% free cash flow yield easily covering the market-leading ~8% dividend yield:
The company is by no means perfect, but it's trading at such a low valuation relative to its peers, offers a high yet sustainable yield, and is positioned to grow going forward.
ATCO - A Hot Discount on Essential Infrastructure
ATCO (OTCPK:ACLLF) has an incredible track record for a company that most people have never heard of.
The company has raised its dividend for nearly three decades and outperformed the broader market while doing it.
Yet this premier infrastructure company flies under the radar of nearly every investor. Why? Because it is boring:
And yet boring infrastructure like the kind ATCO owns and operates is the lifeblood of the world economy.
The company has a $22 billion diversified portfolio of:
- Energy transportation
- Real Estate
These are business operations backed by real assets, all of which are essential in nature. As a result, the company generates extremely reliable cash flow from very predictable long-term contracts.
Sure, you aren’t getting the potential growth of the next new tech company. But you get a predictable, cornerstone investment that has rewarded shareholders with increased dividends for 28 years.
Even then, we believe the company does have growth potential too. The US and other countries continue to discuss significant investments in infrastructure, which will prove a major tailwind over the coming years for companies like ATCO.
In a separate article, we went so far as to call infrastructure a "generational investment opportunity” because governments around the world are extremely indebted and need the help of private investors to fund large-scale infrastructure projects via private/public partnerships.
Some companies already have repriced in light of this trend, like Brookfield Infrastructure Partners (BIP), which hovers near all-time highs:
Yet ATCO’s share price has flatlined even in the face of steady dividend increases from management:
But perhaps the craziest thing of all is that ATCO is actually less risky of an investment than BIP.
Its portfolio of infrastructure is more diverse, while BIP is reliant on riskier midstream businesses. Plus, the balance sheet is in better shape. ATCO boasts $1 billion of cash on hand and has an A- credit rating from S&P.
It’s hard to rationalize the disparity in performance between ATCO and BIP. The only conclusion we can draw is that ATCO is significantly undervalued relative to its peers. If we chart the company’s price-to-book value, it is currently at a near all-time low in terms of value:
To be clear, BIP is a fine holding too, and we think it's fairly valued here. The company is similarly essential, generates huge cash flow, and has plenty of growth ahead of it.
But ATCO’s share price hasn’t even come back to where it was before the COVID sell-off, showing it’s still aggressively discounted for no good reason that we’re aware of:
- To reach its pre-COVID share price, Atco would need to rise 25%
- To catch up to BIP’s valuation, it would need to rise nearly 50%
Clearly, there's plenty of upside potential. And you get to lock in a 4.5% yield while you wait. Not bad.
If you want to make real money in the markets, oftentimes you must be a contrarian. That means moving against the crowd into unloved stocks and sectors with lots of potential.
Despite the mainstream focus on growth stocks, we continue to find attractive investment opportunities elsewhere.
Investors must zig when others zag, to paraphrase Sam Zell. The High Yield Investor portfolio is currently doing that, and the results speak for themselves.
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This article was written by
Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.Samuel runs High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ACLLF; TEF either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.