2023 has been a really strange year. AI euphoria has captured the attention of Wall Street and investors. To be clear, the impact of AI is likely to be as powerful as that of the internet in many respects, or at least on the same wavelength. With that said, euphoria tends to create bubbles and I think we are clearly in one, just like we were in 2000. Nvidia is an amazing company with a fantastic future. CNBC can’t stop gushing about it. The market capitalization is $1.2 trillion for a company that has earned $10 billion over the last 12 months, equating to a P/E of 120. The forward P/E is around 50 incorporating the immense expected growth. The stock has an enterprise value of 46x sales, which is one of the highest levels you will ever see on such a large cap stock. If you have made money on Nvidia that is fantastic and congratulations. It’s been a great story, but as investors we don’t have to swing at every pitch. Many of the stocks that are leading this year, were down 30-60% last year. They are trading at dangerous multiples, which demand virtually perfect execution to justify, offering little to no margin of safety.
On the other side, value stocks and bonds are trading at some of the most attractive valuations we have seen. The spread between growth and value valuations is one of the highest in history. The bulk of stock returns over the long-term come from actual dividends paid, which might be counterintuitive to most people’s perception of huge growth stories. Nvidia has a free cash flow yield of less than 1% and a dividend yield of .03%. In this market, fears of higher interest rates have caused many extremely valuable real estate companies to trade at levels we haven’t seen at many years. Real estate is attractive because the assets can generate increasing revenues for many decades. Of course, not all properties or real estate sectors are created equal, but now is one of the rare times when you can buy well-financed and diversified companies, paying sustainable high single-digit dividend yields, at some of the lowest valuations we have seen.
For example, W.P. Carey (WPC) is a diversified REIT with 99% occupancy. The rents are increasing at either a fixed rate or via a CPI link, but the negative is that higher interest rates are increasing the cost of funds as debt matures and ultimately has to be refinanced. The stock now yields an extremely attractive 6.5% dividend, which we expect to grow by mid-single digits per annum over the next 5 to 10 years. The stock is down from its 52-week high of $87.30, trading at around $65. While the short-term is murky, we are buying fantastic real estate paying us an attractive and growing dividend, with 50% upside once rates do start heading downwards.
Vici Properties (VICI) is another example of a unique and growing real estate company that has been hurt by higher rates, offering us the ability to buy at a compelling valuation that should provide us double-digit returns into the future. The company owns the real estate of many casinos. Like WPC, it is a triple net lease, where the tenant is responsible for nearly all maintenance costs including taxes. The stock yields 5.1% and trades at a price/FFO of only 12.55, which is very cheap for a company with a clear path to grow FFO and dividends. If rates fall, these stocks will likely see their valuations surge to 16,18, or even 20x FFO, and they still would be dramatically cheaper than most of the large Tech stocks dominating the market. Three years ago, when rates were lower, everyone wanted real estate and were willing to pay exorbitant prices for these same companies. By being contrarian and being willing to take a 3–5-year time horizon on some of these stocks, we have a great opportunity to see material growth and income, with far less risk than the overall market, which is trading expensive due to the concentration of those 8 glamour stocks that account for such a large percentage of the indices.
There are many more examples I could give, of high-quality companies yielding between 5-8% dividends in our portfolios. These companies provide cash flow for retirement or that can be reinvested. It’s not common to have these opportunities, as they are just way out of favor because all of the attention is on those glamour companies. In investing we have to run our own race at our own pace. Our goal is to make enough money to have a comfortable life. A big part of that is not getting blown up when bubbles pop, so keep that in mind when the drunk revelry and euphoria of Wall Street seems too enticing to pass up. If we get another lost decade like from 2000-2012, which I think is a fair possibility, these high-yielding bonds and stocks will be a goldmine in your portfolios.