The S&P 500 returned +1.82% in the fourth quarter of 2016 and 9.54% for the year-to-date. The year-to-date return of 9.54% is impressive given that market pundits had predicted a fall in stocks on a Trump win.
During the quarter, many investors were caught flat-footed as stocks rebounded sharply in the cash market following heavy selling in the overnight futures and Asian markets.
But why the head fake?
Fiscal Expansion
According to market experts, the pivot from sell to buy reflected bets by big investors that Trump’s promises to increase government spending, cut taxes and ease financial regulations will outweigh his anti-trade policies.
As such, stocks positioned for growth, like banks and companies tied to infrastructure and transportation, were rewarded and bought intensely. Conversely, dividend paying safe-haven stocks were shunned.
New Positions
Amid panic selling of safe havens/slow growers and panic buying of risk on/growth assets after Trump won, I added three new positions to the Prudent Value Portfolio.
Two of the three new positions added were in Real Estate Investment Trusts (“REIT”), and the third was a Consumer Staple. The largest of the three purchases was Omega Healthcare Investors Inc. (OHI).
OHI is a self-administered REIT providing financing and capital to the long-term healthcare industry. OHI’s portfolio of investments includes approximately 950 healthcare facilities, located in over 40 states and the United Kingdom that are operated by over 80 third-party operators.
The portfolio consists of approximately 780 skilled nursing facilities (“SNFs”), 85 assisted living facilities (“ALFs”), 15 specialty facilities, one medical office building, and fixed rate mortgages on 55 SNFs and two ALFs.
Valuation
OHI is the largest skilled nursing facilities REIT with more than twice as many properties as its next largest competitor and is playing the role of consolidator in this large and fragmented market.
Concerns over future rents based on Medicare and Medicaid reimbursement rates allowed us to add OHI shares at an attractive valuation near its 52-low. The shares yielded approximately 8% at purchase, and is payable quarterly.
As we enter 2017 with a sense of optimism under new leadership with Trump at the helm, we remain focused on the business fundamentals of our portfolio companies with the aim of achieving attractive risk-adjusted returns over the long run.
Photo Credit: Gage Skidmore via Flickr Creative Commons
