Something Old...
A caveat: stocks selling at depressed prices in a relative momentum market like the one we are in now are depressed for a “reason.” It may be a good reason or a dumb reason, based upon accurate analysis and perceptions or emotional reactions and feelings. It’s our job to find the ones that are depressed for transient or incorrect reasons and buy those, while avoiding those which are depressed because of fundamental problems with their business or their market.
Now that we have protected our portfolios with a substantial income position, it’s time to expand our universe to include more dividend-paying stocks. Two old favorites, previously in our portfolios, are selling for less than we previously sold them for: Senior Housing Properties Trust (NYSE:SNH) and National Oilwell Varco (NYSE:NOV).
SNH owns nearly 400 properties in 40 states providing the critical health needs of tens of thousands of senior Americans via its independent living and assisted living communities, continuing care retirement communities, nursing homes, wellness centers and medical office, clinic and biotech laboratory buildings. The majority of its properties are triple net leased, meaning that each tenant pays rent and also is responsible for the payment of all operating costs, taxes, insurance and maintenance costs that arise from the ownership and use of property. The Company operates in two primary segments — short term and long term residential care communities is one, and medical office buildings is the other.
I’m fine holding SNH through a market downturn because I’ll simply add to it if it declines further.
This is a steady long-term play based upon the graying of America. Already, one in seven Americans is over 65. In 15 years, one in five Americans will be over 65. Forget Twitter. Invest in totter instead.
That’s not meant to be flippant, merely a shorthand way to state the case. The entire developed world is aging and we are going to need to face facts and prepare for the inevitable. Many of us will, at some point in our lives, need assisted living. All of us will be visiting the doctor more. In both cases, SNH owns and operates facilities to be there for us when needed. Most everyone wants to live in their own home until they die, but for many that simply won’t be an option. The chart above is startling. I had no idea so many seniors not only have so much of their net worth tied up in their homes, but how many (as a result of take-out refinancing and home credit lines in previous years?) still have whopping mortgages to pay off. I doubt all of them will be able to or will choose to. In fact, according to the U.S. Census, if you take their homes out of the equation, older Americans' actual net worth is vastly lowered — from a median net worth of $170,516 to just $27,516.
I see two things happening as a result of this: (1) a lot of people will be selling and moving to adult communities, using that freed-up cash to enjoy their lives, making the transition to assisted living much easier later in life, and (2) residential home builders are going to be competing with a lot more existing home inventory in the future!
At $24, SNH sells for a trailing P/E of 29, (20x projected,) a price/cash flow (P/CF) of 14, a price/book value (P/B) of 1.8, has a market cap of $5 billion and an enterprise value of $6.8 billion, and yields 6.5%. I think the world will be beating a path to their, and their competitors’, doors.
NOV is another former portfolio holding that is even cheaper today. I don’t believe it will be that way for long. NOV is “the” provider of equipment and components used in oil and gas drilling and production, oilfield services, and supply chain services to the oil and gas industry. The company conducts operations in more than 900 locations across all 6 continents. (No, not in Antarctica.) The company has a legendary tradition of pioneering innovations which improve the cost-effectiveness, efficiency, safety and environmental impact of oil and gas operations.
In the oil business, the mantra is that if NOV doesn’t carry it, it doesn’t yet exist. That goes for land drilling operations as well as offshore exploration and production. This month they are scheduled to spin off one of their subsidiaries, the tools rental unit. Both may be worth holding. In anticipation of this change, the company increased its quarterly dividend to $0.46 per share. The dividend is payable June 27, 2014 to stockholders of record on June 13, 2014. The yield based on the new pay-out is 2.3%. NOV’s market cap is $32 billion with an enterprise value of $34.5 billion. It sells at a trailing PE of 13, P/CF of 10.5, and a P/B of1.4.
...Something New
In line with my comments about SNH, let me introduce you to what I believe is one of their top competitors, Omega Healthcare Investors (NYSE:OHI). This is not a depressed stock at all; in fact, it is trending near its high for the year. On the other hand, it is in an industry we really like for the long pull, it is well-managed, and even at $37 it yields 5 1/4%.
OHI operates as a real estate investment trust, investing in income-producing healthcare facilities, mainly long-term care facilities located in the USA. It provides lease or mortgage financing to qualified operators of skilled nursing facilities and, to a lesser extent, assisted living facilities, independent living facilities and rehabilitation and acute care facilities. It’s a worthy competitor to SNH: its portfolio of investments consists of 478 healthcare facilities located in 34 states and operated by 46 third-party operators. The bulk of the company’s holdings is comprised of 418 skilled nursing facilities, though it also holds16 assisted living facilities, 11 specialty facilities, and fixed rate mortgages on 31 long-term healthcare facilities.
There’s business enough in this growing industry to support not only SNH and OHI but a whole host of other competitors. Omega has a market cap of $4.7 billion and an enterprise value of $6.7 billion; it sports a P/E of 23, a P/B of 3.4, and a P/CF of 16; and it pays the aforementioned %.25%.As with SNH, I expect to see these dividends regularly increase.
Finally, let me offer a name already well-known to many of Stanford Wealth Management’s clients. I read voraciously and one of the subjects that fascinates me is the never-ending torrent of articles proclaiming The End of Oil or Peak Oil Reached or some other nonsense. I’ve been hearing this for 40 years, yet technological breakthroughs in finding, drilling, producing and distributing fossil fuels keep us well-supplied, secure in our heated, air-conditioned, well-lit homes and transported between there and wherever else we choose to go.
As I read, I find new names that intrigue me. One of the under-explored areas of the world is offshore South America. Years ago, researching the explorers active in this area, we bought YPF (NYSE:YPF). Later, not trusting in Brazilian governance or transparency, we passed on the Petroleo Brasileiro SA- Petrobras (NYSE:PBR) Brou-Haha and, I’m glad we did.
But I enjoy visiting Colombia, which I did most recently this past November, and have always been intrigued by the Colombian national oil company, Ecopetrol (NYSE:EC). Geologically similar to neighbor Venezuela, but politically light years away, it seems to me that Ecopetrol might be on the brink of making Venezuela-size discoveries offshore. I’m not alone in this thinking. One of the editors with whom I exchange ideas and newsletters is Vivian Lewis, doyenne of global investing and editor of Global Investing [http://www.globalnvesting.com]
Vivian has also written about EC of late. I think the company is poised to become one of the great national oil companies. Unencumbered thus far by partisan politics or a government that sees its corporations as a giant piggy bank (as do, say, Russia, Venezuela, China, Nigeria, Saudi Arabia, and on and on and on...) EC has the cash flow to diversify geographically. In fact, I imagine some citizens of Mexico, those who wanted to see Pemex, their national oil company, remain in its pure and decrepit state, would rather see anyone but the US assist Pemex in joining the 21st century. Ecopetrol may have an inside edge culturally, technologically and economically. I think Mexican improvements to their massive oil production infrastructure may benefit both NOV and EC!
That’s not to say of course, that the company has no problems. As Pericles admonished, "Just because you do not take an interest in politics doesn't mean politics won't take an interest in you." EC is caught in the middle of both native Indian resistance and the current negotiations between the government of Colombia and the FARC, a once-Marxist populist movement that has since degenerated mostly into a large number of mercenary terrorists defined less by ideology than by a hunger for power via extortion.
As to the former, the U’wa indigenous tribes object to the taking of oil because they believe their ancestors are part of the billion barrels of what they call the “sacred blood” of the earth and you and I call oil. Now, before anyone snickers, we were all raised with the shorthand layperson explanation that oil is the compressed decomposed bodies of dinosaurs, right? It is, indeed, the result of carbon-based life forms — like plants, dinosaurs, and you and me — decomposing into a rather more inert form of carbon. So maybe the U’wa are on to something. Or maybe they’re just holding out for a bigger share of the spoils. At any rate, it’s a big headache for Ecopetrol.
The bigger headache is the FARC. The places the U’wa haven’t been blowing up the EC pipelines, the FARC has been — and they have deeper pockets and bigger things that go boom. (There have been more than 30 FARC attacks on Ecopetrol pipelines since the first of the year. Since oil is Colombia’s biggest “cash crop,” eclipsing both cocaine and cut flowers, the FARC can extort more concessions from the government the longer EC can’t export its oil.) So EC has to negotiate with the U’wa, the FARC and the government just to get their oil to market. And we can’t even get Keystone built?
With Ecopetrol we are buying Colombia's largest oil and gas company, accounting for more than 60% of total production. It is the fourth largest oil company in Latin America. EC is also involved in exploration and production activities in Brazil, Peru and the US Gulf Coast and owns the main refinery in Colombia, most of the network of oil and multiple purpose pipelines in the country, petrochemical plants, and an increasing presence in biofuels.
The market cap is $75 billion, enterprise value $77 billion, PE is 11 and the yield is over 6%.