Top 3 blue chip stocks for 2022
The market has been incredibly volatile lately.
One day, stocks are up 2-3%.
The next day they are down an equivalent amount or more.
This volatility is a result of the highly uncertain world we live in, and unfortunately, this uncertainty doesn’t seem to be ending anytime soon:
Daily covid deaths are near an all-time high and a new variant may be imminent.
Meanwhile, Russia is threatening war against Ukraine, which could easily lead to another East-West Cold War scenario or worse.
Inflation is also at its highest in over 30 years and the Fed will likely be forced to raise short-term interest rates significantly.
This combination of health, geopolitical and monetary uncertainty is a perfect mix for volatility to continue to run wild.
How to fight against volatility?
We buy blue chips.
Blue chip companies typically have strong balance sheets, superior management teams, and solid businesses that can thrive regardless of the market environment.
Unsurprisingly, blue chips tend to outperform in times of uncertainty, and given the environment we live in, we believe now is a good time to stock up.
Unfortunately, famous blue chip companies like Walmart (NYSE: WMT)McDonald’s (NYSE:MCD)and Procter & Gamble (NYSE:PG) are rarely offered for sale. On the contrary, most of them are now at record prices:
Fortunately, one sector of the market still offers blue chips at discounted valuations.
I am referring here to REITs (NYSEARCA: VNQ).
Since the start of the pandemic, REITs have significantly underperformed the rest of the market. The market is worried that office buildings, hotels and malls will suffer for a long time, and it might even be right about that. But what the markets seem to miss is that most REITs are investing in other real estate sectors, many of which have actually benefited from the pandemic. To give you some examples:
Personal storage is today doing better than ever because storage space in apartments is being converted to home offices, more and more people are moving and, as unfortunate as it sounds, covid deaths are also increasing the demand for self-service storage space because all the extra stuff from older generations has to be stored somewhere.
In the same way, cell towers benefit from the rapid growth of data consumption. The rapid growth of Zoom (NASDAQ:ZM) and other remote working technologies directly benefit these REITs.
Finally, life science buildings are in greater demand than ever as significant resources are invested in the fight against the pandemic and other diseases. If you own high-quality properties, your rents are likely rising rapidly and property values are at an all-time high.
Despite this, there are blue chips in these three real estate sectors that remain undervalued. We believe they are discounted because they have been lumped together with other struggling REITs, which has hurt their market sentiment.
In the following, we highlight 3 top REITs that we are accumulating at current prices. They have been solid outperformers in the past and we expect that outperformance to continue in today’s world of great uncertainty.
Large Yellow Group (OTC: BYLOF):
The first self-storage real estate in Europe has fallen by 15% in recent weeks. Historically, it has always been a good idea to buy the declines of BYG as it has compounded investor capital at over 15% per year since its inception.
We believe it can continue to provide above-market total returns for a long time to come, as the self-storage market is severely undersupplied in Europe with only 1 square foot of space per capita compared to nearly 10 in the US .
As rents in major cities continue to rise, we expect more and more people to settle for smaller apartments/houses/offices and rent storage space for their extra belongings. Alternatively, if they can afford it, they will continue to rent larger apartments, but instead of having an extra room for storage, they will use it as a home office and rent storage space instead.
Following the recent liquidation, we believe the company is valued to continue to generate annual total returns of around 15%, which is very compelling for a defensive company. The dividend yield is low at 2.6%, but the company has grown its cash flow per share by 14% per year since 2004, and that growth only looks to accelerate in the future. In 2021, the company increased its dividend by 21%, a new all-time high.
Crown Castle (CCI):
The blue chip cell tower REIT has also fallen 15% in recent weeks. Much like BYG, it has always paid off to buy CCI’s drops in the past. It has consistently beaten market averages, delivering average annual returns of around 15% throughout its history, and we expect these strong returns to continue.
CCI pays a dividend yield of 3.5% and has guided annual growth of around 8% in the coming years. If you add some multiple expansion to that, you again get close to 15% annual total returns from a conservative blue-chip.
We have recently bought more and expect to continue accumulating as long as the stock price remains at these levels. Cell towers are vital to our society and the pandemic is a tailwind, not a headwind for them.
Alexandria Real Estate (ARE)
Finally, Alexandria Real Estate also recently fell around 15% for no good reason. Again, this is a blue-chip that has always recovered from past declines and continued to outperform the market over the long term.
As a leader in life sciences, ARE has a Class A portfolio with potential for rapid rental growth in the post-pandemic world, and on top of that, it has an extensive pipeline of new development opportunities that should significantly increase its footprint in the coming decade. It is building at a yield of 6-7%, but its cost of capital is closer to 4%, leading to significant spreads that should drive growth in FFO and dividend per share.
The dividend yield is 2.4%, coupled with annual growth of around 8%, and some expansion in FFO multiples should also bring it closer to the 15% annual total return mark in the coming years. This is not far from what he has achieved historically.
In times of uncertainty, we stock up on discounted blue chips, and today most of the opportunities are in the REIT sector.
Big Yellow, Crown Castle and Alexandria are three of our favorite opportunities right now, but there are plenty more.
By building a well-diversified portfolio of such opportunities, you can further mitigate risk and achieve above-market returns with below-average risk.