Investors Alley

An Auto Parts Winner in a Greener Future

The global auto industry is in an all-out drive toward a cleaner and greener future.However, for some suppliers to the auto industry, it has not been a pleasurable joyride.

Instead, current conditions are more like driving on a icy, treacherous mountain road in the middle of a blizzard. Only the most skilled drivers will make it to the bottom of the metaphorical mountain intact.

Tough Sledding for Auto Suppliers

Most auto suppliers are already feeling a squeeze due to rising energy prices and rampant inflation in other parts of the supply chain. They have little choice but to shoulder most of the extra costs of making their components sustainable to help the automakers meet their environmental targets.

And make no mistake: the carmakers are pushing their suppliers hard. For example, Reuters reports that BMW expects all of its battery and many of its steel and aluminum providers to produce materials made using renewable energy, while Volvo Car is targeting 25% recyclable plastic in its cars by 2025.

Consequently, many suppliers to the automobile industry are making large investments to “green” their companies, doing everything from developing recyclable parts to using renewable energy.

Simultaneously, many of these same firms have little leeway to raise the prices they’re charging automakers, which are themselves focused on reducing costs. Automakers are spending tens of billions of dollars to shift their focus to producing electric vehicles.

This difficult situation faced by the auto parts industry was summed up nicely by Joe McCabe, CEO of the research firm AutoForecast Solutions, who told Reuters: “We use the term disruptive all the time, but it’s much more than just disruptive. We’re going to see a real big shakeout the next five, 10 years in the auto supply chain.”

In other words, the auto industry’s move to a greener future, alongside the supply-chain problems that began during the pandemic and soaring costs, has killed the profit margins for auto parts suppliers and created a perfect storm for the industry.

It is likely that only the strongest and shrewdest companies will survive this extinction event in the sector. The rest will go the way of the dinosaur.

One company that I believe will survive is TE Connectivity (TEL). It is able to pass along price increases to its customers, and it pays a dividend, too.

TE Connectivity

TE Connectivity is an American-Swiss technology company that designs and manufactures connectors and sensors able to withstand harsh environments for a number of industries. These industries include automotive, industrial equipment, communications, aerospace and defense, medical, energy, and consumer electronics.

Going green is costly for even the biggest suppliers, and TE Connectivity certainly isn’t immune. But it is a bit ahead of the curve, having launched its own sustainability drive in 2020. The company is presently working on recyclable products with automakers including Volkswagen, Volvo and BMW.

Of course, TE Connectivity continues to face supply chain challenges—but it seems to be navigating the headwinds well, as indicated by its continued price increases to customers that aid the company in offsetting inflationary pressures.

And the long-term thesis of growth that stems from increased vehicle electrification is holding up well, as management reaffirmed in its latest quarterly earnings results. Management expects electric vehicle production to be up more than 30% for the year, while the total automotive production environment is expected to remain flat.

The company’s third-quarter sales grew 7% year over year, and 2% sequentially, to $4.1 billion. Organic growth could be seen across all business segments.

Some of TE Connectivity’s other businesses, outside of automotive, did extremely well. Two of the largest growth areas were in the industrial equipment and data and devices end markets. Both grew at 27% on a year-over-year basis.

The industrial equipment segment saw continued benefits from increased factory automation applications, while the data and devices segment achieved its outperformance thanks to market share gains in artificial intelligence applications and high-speed cloud content growth.

TE Connects to the Future

The company’s balance sheet is sound, with very low net debt to EBITDA. That allows it to return an appropriate amount of capital to shareholders.

Management’s goal is to return two-thirds of free cash flow to shareholders, of which one third will fund the firm’s dividend (current yield is 2%) and the other third will be used for opportunistic share repurchases. However, this goal is often exceeded when management doesn’t find value-accretive deals for its cash.

TE Connectivity has raised its cash dividend every year since 2010. Over the past five years, the company has returned an average of more than 80% of its free cash flow to shareholders.

TE Connectivity has maintained a leading share of the global connector market for the last decade,

thanks to its dominance in the automotive connector market, from which it derives nearly 50% of its revenue. I do not expect the company to lose its dominant position. Morningstar reports: “While the firm’s entire business benefits from trends toward efficiency and connectivity, these are especially notable in cars, where shifts toward electric and autonomous vehicles provide lucrative opportunities.”

Just like other tech-related stocks this year, current market conditions have hit TE Connectivity, with a drop of 29%. It is a buy anywhere up to $120 per share.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

The Perfect Stock to Buy in a Bear Market

It is official: we are in a bear market.

What should we do now?

Sell stocks? Assume the fetal position and hide under the kitchen table with a death grip on a bottle of cheap tequila? Get a medical cannabis card to ease the pain of losing money? Buy gold and silver? Hide all our cash in a mason jar buried under the shed? Watch the financial and news media to get advice?

Too many people will go down one of more of these paths as the bear market sinks its teeth into their portfolios.

But history suggests that if you are still in the accumulation phase of life, you should probably start buying stocks. Warren Buffett is one of the richest men in the world because he mastered the skill of buying aggressively in bad markets.

I suspect this particular bear is going to hang around for a while. It will take the Federal Reserve some time to wrestle the inflation dragon back into its cage, and rates will go higher and stay there for longer than most traders active today have ever seen.

There will be some of those rip-your-face-off bear market rallies along the way, but in the meanwhile, we should have plenty of time to build significant positions in good companies at great prices.

Keep an eye on two particular groups of people here for ideas about which companies to buy. One is the activist investors that take positions in companies they think are undervalued and then push the management and board to make changes that can push the stock price higher.

The other is insiders. Managers and directors know more about the businesses they run than anyone else—so when several of them are buying stock in their own companies in the open market, it is a bold statement about what they think of the companies’ current valuations.

Following insiders in the 2020 sell-off helped me spot the opportunity in Matador Resources (MTDR) right before the natural gas company went on a run that took shares above $65

I have recently noticed that the officers and directors, including the CEO, have been buying shares of Hanesbrands (HBI), manufacturer of underwear and athletic clothing. The company may see some slowing in sales thanks to a weak economy, but there is little to no chance it will go out of business anytime soon.

If markets get bad enough, the company might even see a sudden increase in demand for one of its product lines!

Hanesbrands includes a fantastic collection of companies with household names. Hanes, for instance, is the leading manufacturer of men’s underwear, with twice the market share of its two closest competitors combined.

The company owns Champion, the company that invented the hoodie 80 years ago and still dominates the market, as well as Playtex, Bali, and Maidenform—three of the most dominant women’s undergarment manufacturers—and Bonds, the dominant men’s underwear company in Australia.

Hanesbrands also owns most of its production and supply chain facilities. In addition, it has local manufacturing in more than three dozen countries worldwide. Almost 80% of the more than two billion pieces of clothing Hanesbrands sells globally each year are produced in company-owned factories.

Seven different insiders have been buying shares in the open market this month.

The stock is trading at less than seven times sales and under $0.50 on the dollar of sales. That’s cheap for a company that is a leader in its industry.

The recent decline has made the shares a high-yielding stock, with a dividend yield of over 7.5%. Moreover, the payout ratio is just 0.47%, so I can see no danger of a dividend cut on the horizon. Hanesbrands has also been buying back stock over the past few years and still has $575 million to buy under the current buyback plan.

It is a bear market. The stock will probably move against you after you buy it.

You can buy in stages if you prefer. Buy a little now and add on every move down.

You may get frustrated because the stock won’t move higher, even though the business is clearly worth more than the current price. But that’s the nature of bear markets. Make this one work for you and not against you and scale into a decent-sized position in this market leader. The bear market will end at some point. When it does, I suspect patient-but-aggressive investors will be able to cash in their Hanesbrands positions for several multiples of the current stock price.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

Ride This Rail of This Stock to Profits to Beat Inflation

There are two big forces at work that show why the inflation beast will not be easy to tame for the Federal Reserve.

First, although overall consumer demand is slowing, it still remains strong in many sectors. Second, many supply chain woes are still resolved.

Supply chain disruptions due to the coronavirus pandemic were expected to gradually subside as global restrictions were lifted. Yet, the supply chain situation has actually worsened because of increased geopolitical risk and ongoing lockdowns and restrictions due to China’s zero-tolerance COVID policy.

My contacts in the logistics industry tell me that supply chain problems may not be resolved until mid-decade… and with de-globalization fully underway, these some of these headaches may never be completely resolved!

In this brave new deglobalized world, you want to own sectors and companies that can prosper under these conditions.

One such sector—and one totally ignored by Wall Street—is the rail sector. Moving goods by rail is approximately four times more energy efficient (per ton-mile of freight) moving by truck. As inflation rises, the efficiency of railroads for moving freight is looking more and more attractive…and my favorite stock in the sector, Canadian Pacific Railway (CP), comes with another big plus.

Canadian Pacific Railway

Think about this…as the world continues to isolate Russia, Canada offers the best alternatives for many of the commodities and products most closely associated with Russia, including Canadian grains, potash, fertilizer, oil, coal and natural gas. In fact, even before the Ukraine invasion, CP was shipping a lot of potash for export to China.

Canadian Pacific offers the best rail network coverage from one end of North America to the other. Last December, the company completed its acquisition of Kansas City Southern Railway, subject to final regulatory approval. This acquisition creates the first rail network that spans Canada, the U.S. and Mexico—which will provide the company with a competitive market reach in the quickly evolving supply chain.

Here is just one example that Canadian Pacific has analyzed completely: in the freight markets connecting Mexico to the U.S. Midwest, each and every day prior to Canadian Pacific’s merger with Kansas City Southern, an armada of trucks set out to connect auto parts and auto assembly plants spread across the Midwest and Mexico.

These long hauls are naturally opportune situations for transport by rail. But since no single railroad connected these regions, manufacturers were forced to rely heavily on trucks. The merged Canadian Pacific rail network will be able to convert to rail shipments the 64,000 truck shipments that currently clog public highways and border crossings as they move between Mexico and the Great Lakes region.

Add to all of this the company’s sharp management.

The company’s change in fortunes began in 2012 with the appointment of railroading legend Hunter Harrison as CEO. Harrison and his successor, rail operations expert Keith Creel (who worked alongside Harrison for 20 years), have between them taken Canadian Pacific from having of the worst Class I railroad profit margins to among the best. Creel has further infused the company’s culture with precision-scheduled railroading principles, which is largely behind its progress.

CP’s Bright Future

Keep this one important fact in mind when thinking about rail stocks as an investment: the network of track and assets already in place because of North American Class I railroad companies—designated as such based on their revenue—is essentially impossible to replicate.

Sounds like a classic Warren Buffett moat to me. No wonder his Berkshire Hathaway (BRK.B or BRK.A) owns BNSF Railway.

I expect Canadian Pacific’s 2023 operating ratio to improve—volumes should have rebounded in the second half of 2022 thanks to recovering grain shipments as well as auto carloads. Pricing power should remain healthy as well. The late-2022 Canadian grain harvest is currently expected to be much better than last year’s—a key driver of carload volume recovery by late 2022 through early 2023.

Morningstar says that: “Longer term, we believe CP’s pricing power will prove sound (above rail inflation), as will its ability to neutralize diesel price shocks via surcharges.”

The publication adds: “CP is an incredibly well-run railroad with a highly talented leadership team and an excellent track record in terms of efficiency improvement over the past decade, thus we consider deal risk [Kansas City Southern] to be relatively modest. We also agree that the merger makes sense from a strategic perspective and believe the combined railroads will forge meaningful opportunities on the revenue front, thanks to adding new seamless single-line services.”

A nice summation that I totally agree with.

Canadian Pacific stock has handily outperformed the S&P 500 year-to-date, rising about 2% versus a loss of nearly 20% for the S&P 500. CP shares are a buy on any stock market weakness, on worries about the economy, anywhere in the low-to-mid $70s.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

When THIS stock crashes…that could be the bottom

Retail investors are resilient.  While institutions have de-risked their portfolios… Retail investors have kept record amounts of money in equities despite the markets wavering.  There’s one stock I’m watching… it’s held up fairly well during this beatdown.  While other stocks in the sector have dropped 90%… it’s only down 20% or so.  But, I believe, …

When THIS stock crashes…that could be the bottom Read More »

My #1 Pick for Making Money from the Housing Crash

With inflation running rampant, the Federal Reserve is responding by ratcheting up interest rates. The result is that mortgage rates have more than doubled over the last year. Higher rates have pushed many potential buyers who could have afforded to buy in 2021 out of the market in 2022.

For a $300,000 mortgage, a buyer who takes out a 6% loan today will have payments that are $600 higher than one with a loan at last year’s 3% rate. As a result, home sales numbers are crashing—down 19.9% as of August, compared to a year earlier.

Us income investors don’t have to worry, though. There’s a whole class of investments that will generate more and more income as the housing market crashes. Here’s my top pick…

For the time being, hopeful home buyers who can’t afford the higher premium payments on a mortgage must continue to rent. And with home purchases becoming increasingly unaffordable in many markets, there is an undersupply of rental homes. As a result, rental rates continue to rise: Apartment Income REIT Corp. (AIRC), for one, recently announced that for August, weighted average rents were up 14.0% compared to a year ago.

You can invest in residential rental housing through real estate investment trusts (REITs). Several REIT subsectors cover residential properties, including apartment REITs like AIRC, as well as single-family home REITs, manufactured home community REITs, and senior living REITs.

There’s now a newer ETF focused on residential REITs: the Home Appreciation U.S. REIT ETF (HAUS), which launched in February 2022.

In hindsight, that timing wasn’t great: HAUS has returned minus 11.8% since the February 28 launch. However, that return is in line with the broader market, with the SPDR S&P 500 ETF (SPY) down 11% over the same period.

Being so new, HAUS assets are very small. I expect the fund to grow over time, but with the market in turmoil, it may take time for the ETF to build up its asset size. I have added HAUS to my Monthly Dividend Multiplier portfolio, with a small start-out position.

HAUS’s top 10 holdings, below, would be a good place to start your research if you want to invest in individual residential rental-focused REITs:

As long as mortgage rates stay high and home prices do not drop significantly, many potential homebuyers will be priced out of the market. That economic reality makes residential rental properties attractive, with growing cash flows and dividends.
It’s not REITs or blue chips like Disney. A small, little-talked about area of the dividend stock market is pumping out market-beating returns like no tomorrow. Over 22 years, they’ve handily beat the market… and I have the #1 stock of these to give you now.

The Two Best “Stock-Bond Hybrids” for Rising Interest Rates

Preferred stock shares feature a mix of common stock and debt security traits.

In other words, they’re the best of the stock and bond worlds, and offer excellent, secure yields… if you understand how they work.

So today, let’s dig into that – and see the two best preferred stocks to buy today…

Preferred stocks pay a fixed dividend rate. A declared coupon rate will be based on a $25 par value. For example, a preferred with a 6% coupon will pay a $0.375 per share dividend every quarter. When interest rates rise, preferred share prices will fall, just like bond prices. If the hypothetical preferred stock trades for $20, then, the current yield would be 7.5%.

Preferred stocks can be callable but do not usually have a mandatory redemption date. This means you may hold a preferred stock position for years and years, collecting nice quarterly dividends. You receive the $25.00 par value if the shares are called in.

With the Federal Reserve raising interest rates, many preferred stocks currently trade for well below their par values. These low prices mean you can lock in very attractive yields. The point to remember is that you don’t know when or if a particular preferred stock issue will be called in. I tell my subscribers that when they buy preferred stocks, they should think of it as buying a long-term income stream. If shares are purchased for $20 and called in at $25, that would be an unexpected, serendipitous event.

With preferred stock prices down, there are some interesting ways to invest in the sector.

The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) pays stable monthly dividends and yields 9.2%. That yield is greater than PFFA’s stable mate, the InfraCap MLP ETF (AMZA), which now yields 8.3%. Historically, AMZA, which invests in energy sector MLPs, carried a much higher yield than the more secure PFFA. The reversal tells me that PFFA is an attractive income investment, now available “on sale.”

Some preferred stocks have fixed coupon rates until their first call date and then switch to a floating coupon rate. The floating rate will be the secured overnight financing rate (SOFR), plus additional interest. SOFR recently replaced LIBOR and will track the Fed Funds target rate. When SOFR/LIBOR was near zero, the change to a floating rate would result in a dividend cut. Now, with rates increasing, if preferred issues let the rates go to the floating rate, the dividends will likely go up. Or the companies will call in the shares.

So, if you buy a fixed to floating rate preferred stock below par, you have the potential for a win-win when the rate switches to floating or the shares are called in. Here are a couple of examples.

The MFA Financial Preferred Series C (MFA.PC) has a 6.5% coupon rate. The shares trade for $18.24, giving a current yield of 8.9%. On March 31, 2025, MFA.PC shares become callable, or the coupon rate goes to SOFR plus 5.345%. If MFA Financial allows the rate to float, and, say SOFR is at 4.0%, the coupon rate would go from 6.5% to 9.345%.

The Rithm Capital Preferred Series A (RITM.PA) shares have a 7.5% coupon rate. The shares currently trade for $21.75 and yield 8.6%. RITM.PA goes callable on August 15, 2024. The floating rate will be SOFR plus 5.802% if the shares are not called. You can do the math.

You should think of preferred stock investments as buying an income stream. There is no certainty that shares will be called in. That said, buying preferred stocks with yields in the 9% range locks in a very attractive income stream.
For the first time in 10 years, we’re launching a brand new income newsletter at our intro price. If you read the Dividend Hunter, this is another newsletter you won’t want to put down. This new newsletter, The 20% Letter, gives you an opportunity to invest in one of the highest yielding assets around.Click here to read more.