Omega Healthcare Investors‘ (OHI) shares are now close to being oversold again and are back at the top of my Christmas shopping list. Since I have closed my position in Omega Healthcare Investors earlier this month and have raised cash, I am waiting to re-enter into a new long position in the low $30s as market volatility remains abnormally high. The healthcare REIT’s shares have become more affordable on the drop, and an investment in OHI yields 7.8 percent.
Recent Stock Sale
I sold 50 percent of my stake in Omega Healthcare Investors in November 2018, and the remaining 50 percent earlier this month at a weighted average price of $37.62. Since market volatility exploded in the last two weeks, it turned out to be a good time to sell the healthcare REIT, even though I consider Omega Healthcare Investors’ dividend to be sustainable over the short haul. In fact, I even think that a dividend hike for 2019 is entirely within the realm of possibility.
Thanks to the December market meltdown, which has pushed major stock market indices into a bear market, Omega Healthcare Investors’ shares are at the brink of being oversold again.
Source: StockCharts
In my last article on Omega Healthcare Investors titled, “Omega Healthcare Investors: Why I Sold Everything“, I explained why I sold OHI:
I made a ~40 percent total return with my remaining investment in healthcare REIT Omega Healthcare Investors since November last year, which is excellent, especially considering that the stock market has surprised to the negative in the last two months. A year ago, when fear was high, it was the time to buy. Today, when investors are greedy, it is time to sell. I am comfortable closing my entire position in OHI at a price that exceeds even my best fair value estimate of $36/share.
I also concluded my article saying that the investment case remained robust, and that I was looking to re-enter into OHI at a lower price point:
Replacing OHI’s 9 percent yield will not be easy, but chances are that investors will be able to re-enter into a long position in the low $30s in the not-too-distant future.
Since investors continue to look for reasons to sell stocks right now, this entry opportunity could indeed come sooner rather than later. Today, Omega Healthcare Investors’ shares can be bought for $33.72, which is at the lower end of my fair value range of $33-$36/share. The current market price implies an 11.1x 2018e AFFO multiple.
Omega Healthcare Investors derives stable cash flow income from its lease portfolio which is why the healthcare REIT could perform better than the average stock in the market. Omega Healthcare Investors is not a pro-cyclical stock and, based on its distribution coverage, should be able to at least sustain its dividend payout in 2019.
Source: Achilles Research
Potential Entry Point
There are lots of reasons for investors to be cautious right now since downside risks have clearly grown. Trade uncertainty, a U.S. government shutdown, fears of decelerating growth, etc., all weigh on investor sentiment, and stock prices could surely fall further from here. In this environment, I think, it makes sense to open a starter position in OHI when prices dip once again, and then dollar-cost average if prices continue to slide.
I am looking to initiate another starter position in OHI around the $30 price level which would imply a 9.9x 2018e AFFO-multiple and an 8.8 percent dividend yield. The $30 price level also indicates a ~10 percent discount from my lowest level fair value estimate of $33/share.
Your Takeaway
Heightened market volatility is a good thing, and it may open up a new investment opportunity in Omega Healthcare Investors very soon. I have raised cash to take advantage of such an opportunity. The healthcare REIT continues to cover its dividend payout with adjusted funds from operations, and the valuation has gotten more compelling again. Shares today sell for just about 11x 2018e AFFO, but could get even cheaper if the market sell-off continues. Speculative Buy @$30.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OHI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Be the first to comment