{"id":79154,"date":"2015-10-05T04:15:55","date_gmt":"2015-10-05T08:15:55","guid":{"rendered":"http:\/\/countingpips.com\/?p=79154"},"modified":"2015-10-05T08:06:17","modified_gmt":"2015-10-05T12:06:17","slug":"combing-for-opportunities-in-the-high-yield-wreckage","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/10\/combing-for-opportunities-in-the-high-yield-wreckage\/","title":{"rendered":"Combing for Opportunities in the High-Yield Wreckage"},"content":{"rendered":"
October 5, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"High-Yield<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

By some measures, 2015 hasn\u2019t been a total disaster.<\/p>\n

Through the first three quarters of this year, S&P 500 constituents are only down an average of 6.2% on a total return basis (dividends reinvested).<\/p>\n

The average stock in the Russell 2000, an index of small caps, is down 7.0%. That\u2019s still not too<\/em> bad.<\/p>\n

However, these returns mask the devastation occurring in high-yield land.<\/p>

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The average U.S.-listed common stock with a trailing 12-month dividend yield of 5% or more is down 19.6%. Here, I\u2019m looking at trailing yield because some of these companies have already cut their dividends.<\/p>\n

Others, like Tronox Ltd. <\/strong>(TROX<\/a>), will soon be forced to cut their payouts. TROX is down 80.7% this year.<\/p>\n

In early 2014, I warned that this type of cyclical, high-beta stock<\/a> would become \u201ccorrosive\u201d to shareholders. Many investors have since been burned.<\/p>\n

Investors have also been scorched by the dumpster fires known as master limited partnerships (MLPs). The average MLP has a total return of -24.4% this year, although many \u201cupstream\u201d energy MLPs have fared significantly worse.<\/p>\n

For example, Legacy Reserves LP<\/strong> (LGCY<\/a>), which was on the Dividend Death Watch<\/a>, is down 59.4%.<\/p>\n

The \u201cyieldcos\u201d are another noteworthy group of high-yield casualties.<\/p>\n

Over the past few years, a plethora of these dividend-paying structures, which typically own renewable energy assets, have been formed by parent companies.<\/p>\n

For example, in 2014 SunEdison Inc.<\/strong> (SUNE<\/a>) created TerraForm Power Inc.<\/strong> (TERP<\/a>), which owns solar power assets. TERP is down 52.5% this year.<\/p>\n

Given the carnage in various high-yield securities, there\u2019s got to be some value somewhere, right?<\/p>\n

Well, caution is still warranted. We have to be worried about dividend and distribution sustainability in many cases.<\/p>\n

Also, the commodity bust will continue.<\/p>\n

As I said in November last year, I firmly believe that we\u2019ll see some magnificent defaults<\/a> in the commodity complex. The unitholders of many overly leveraged energy MLPs will be wiped out, and that\u2019s a problem for all<\/em> MLPs.<\/p>\n

Despite these concerns, I do see some interesting opportunities amid the high-yield wreckage.<\/p>\n

Mortgage REITs: Better Risk-Reward<\/h2>\n

Mortgage real estate investment trusts (mREITs) invest in mortgage loans and mortgage-backed securities rather than owning and managing properties like an equity REIT.<\/p>\n

I warned about mREITs in early 2014 and suggested that their preferred stocks<\/a> were a safer bet.<\/p>\n

Since then, investors have punished the mREITs due to fears of rising rates (both short- and long-term rates). The average mREIT is down 7.9% on a total return basis this year.<\/p>\n

Today, most mREIT common shares are looking far<\/em> better from a risk-reward perspective. After all, we\u2019re not looking for just high yield, but safe<\/em> high yield.<\/p>\n

As you can see from the chart below, the average (market-cap weighted) price-to-book value for mREITs is 0.86 times. Basically, the level of pessimism is at multi-year highs, and valuations are extremely attractive.<\/p>\n

\"Attractive<\/p>\n

Granted, a flattening yield curve environment isn\u2019t an ideal situation for these companies since the spreads between their short-term funding costs and yields on their investments are narrower. But this is already more than \u201cpriced in\u201d given the large discounts to book values across the industry.<\/p>\n

Investors who prefer diversification and don\u2019t want to pick individual stocks should take a look at the iShares Mortgage Real Estate ETF <\/strong>(REM<\/a>), an ETF dedicated to mREITs.<\/p>\n

This is one bombed-out industry that both income and value investors should love right now.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n\n\n\n
Editor\u2019s Note:<\/strong> Alan saved his favorite high-yield security for his Shockproof Investor <\/em>subscribers, and it\u2019s truly a hidden gem. It\u2019s not an mREIT, but it\u2019s close \u2013 and it boasts all of the upside potential and an even more sustainable yield. Try The Shockproof Investor<\/em> for just $5 for the first month right now and learn more about this unique investment opportunity. Click here<\/a> for all of the details.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The post Combing for Opportunities in the High-Yield Wreckage<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Alan Gula, Chief Income Analyst By some measures, 2015 hasn\u2019t been a total disaster. Through the first three quarters of this year, S&P 500 constituents are only down an average of 6.2% on a total return basis (dividends reinvested). The average stock in the Russell 2000, an index of small caps, is […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-79154","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79154","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=79154"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79154\/revisions"}],"predecessor-version":[{"id":79174,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/79154\/revisions\/79174"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=79154"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=79154"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=79154"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}