With equity markets coming off a marvelous 2017 run — the Standard & Poor’s 500 index advanced 19 percent, the Nasdaq composite added 28 percent and the Dow Jones industrial average recently surpassed the 25,000 mark for the first time — investors may find themselves wondering if 2018 can turn out to be another rosy year.
The newly passed tax cuts should help give business a boost this year, but with three interest rate hikes expected from the Federal Reserve, the era of easy money policies seems to be coming to an end. One stock that shouldn’t be too adversely affected by this environment is Store Capital Corp (NYSE: STOR), which was named as one of U.S. News’ Best Stocks to Buy for 2018.
[Read: 3 Ways Real Estate Can Boost Your Retirement Income.]
Haven’t heard of STOR before? You’re not alone. Here’s why investors should be excited for its prospects in 2018 and beyond.
A profile of Store Capital. Technically, STOR isn’t a stock. It’s a real estate investment trust. REITs, however, are also securities that trade, just as stocks do, during all hours of the trading day on the major exchanges.
A distinguishing feature of REITs, aside from the fact that they’re merely a portfolio of properties instead of a traditional business, is their tax efficiency. Unlike stocks, REITs don’t have to pay corporate income taxes so long as they distribute 90 percent of their income directly to shareholders.
This means investors avoid the double taxation that owners of common stock are subject to.
Store’s name is an acronym for Single Tenant Operational Real Estate, which is what the company’s entire portfolio consists of. STOR owns a diversified group of 1,826 property locations with more than 99 percent occupancy, consisting of 382 different tenants in 48 states.
By selectively leasing to large, established and financially sound companies that are largely immune to the disruption of brick-and-mortar retail at the hands of e-commerce, STOR has minimized its risk and enhanced its long-term attractiveness to investors.
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
The weighted average annual revenue of its tenants is more than $800 million, and with a weighted average of 14 years left on its leases and annual rent increases built into its contracts, it’s tough to find a much better portfolio of real estate cash cows anywhere in the market.
Attractive valuation, high dividend, low volatility and Buffett’s backing. “We are positive on STOR as it trades at an attractive multiple of [funds from operations] at 15 times projected 2018 levels,” says Jay Hatfield, portfolio manager for The InfraCap REIT Preferred Fund (PFFR). FFO is a preferred metric for evaluating the earnings power of a REIT.
Like most REITs, STOR boasts an impressive dividend; its current yield is 4.8 percent, more than double the 1.9 percent dividend yield of the S&P 500.
“In addition, the company has a track record of growing the dividend by over 6 percent annually,” Hatfield says.
One of the reasons STOR made an appearance on 2018’s best stocks to buy list is not only its impressive dividend but its relatively low volatility, two qualities which, when considered in tandem, can provide a great anchor for a stock portfolio.
These qualities, combined with the incredible diversity of STOR’s tenants and the long-term nature of its leases, were enough to woo literally the world’s greatest investor, Warren Buffett, to the stock. Buffett’s Berkshire Hathaway ( BRK.A, BRK.B) began snapping up shares of STOR in 2017.
While it may seem unoriginal to follow the footsteps of another investor, there’s no shame in copying the best ideas of the elite Wall Street investors. Indeed, merely following Buffett’s lead since the turn of the century 18 years ago would’ve netted you 486 percent, more than 5 times the 92 percent return of the S&P over that time.
Able to withstand rising rates. REITs are often thought to have higher interest rate risk than equities, but that’s not something hugely concerning to investment professionals at the moment.
“We expect that rates will be higher this year but contained by demand for fixed income investments by the $40 trillion of global pension assets,” Hatfield says. “Consequently, we believe REITs will have good returns in 2018.”
Moreover, Robert Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania, has studied the REIT and interest rate issue. In “Invest With the Fed,” a book he co-authored with Gerry Jensen and Luis Garcia-Feijoo, they revealed some interesting findings.
“We found that equity REITs outperformed the broad equity markets when rates were rising, returning 9.8 percent during rising interest rate periods,” Johnson says. The authors studied the period between 1972 and 2013, finding that stocks rose less rapidly, gaining 8.5 percent annually during periods when rates were rising.
[See: 7 of the Best Tech Stocks to Buy for 2018.]
Store Capital isn’t the sexiest or fastest-growing of the best stocks to buy for 2018, but it’s a relatively conservative pick that income investors and long-term value-focused investors should love.
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Why Store Capital Corp (STOR) Is One of the Best Stocks to Buy for 2018 originally appeared on usnews.com
