2 Monster Stocks to Buy Hand Over Fist and 1 to Avoid Like the Plague

Investing in stocks of monstrous size comes with unique challenges. Growth, for example, can be difficult if it is close to market saturation. Management inefficiencies can also cause problems for very large companies, which can erode profits.

That doesn’t mean monster actions shouldn’t be completely avoided. Rather, investors should simply focus on key stocks while avoiding others. Understanding this, here’s why investors may consider buying real estate giants Prologis (PLD -0.40%) and American tower (AMT -0.89%) while staying away Annaly Capital (NLY -1.07%).

Store

Market capitalization

Dividend yield

The payout ratio

Prologis

$95 billion

2.2%

56%

American tower

$121 billion

2.1%

56%

Annaly Capital

$11 billion

13.4%

73%

Data source: Author’s calculations based on company reports, YCharts.

The first industrial REIT

Prologis quickly established itself as the leading industrial real estate investment fund (REIT). Not only is it the second largest REIT by market capitalization, but it is also the largest industrial operator in the world. The company has nearly 5,000 warehouses and distribution centers in its portfolio, which generated $3.6 billion in annual net income for the company in 2021.

The rise of e-commerce and the shift to more localized manufacturing solutions has dramatically increased demand for this vastly undersupplied industry. In the second quarter, less than 3% of Prologis’ portfolio was vacant, making it one of the lowest vacancy rates in the industry. Its net effective rental growth, which includes new leases and renewals of its properties, has increased by 27% over the past year.

Despite its already massive size, the company is far from done growing. Prologis is in the process of acquiring one of its competitors, Duke Real Estate, part of a $26 billion deal that is expected to close by the end of the year. This monstrous acquisition will add 153 million square feet of operational industrial space to Prologis’ portfolio. The REIT also has 10,700 acres of land available for future development and 7.7 million square feet under active development today.

Not to mention that it is well financed and benefits from a very healthy balance sheet. Its 2% dividend yield isn’t terribly exceptional compared to most other high-dividend-yielding REITs. But given its growth potential and absolutely massive portfolio, it’s definitely a stock to buy and hold.

The interconnect giant

Owning and leasing 220,000 cell towers, antennas and data centers in 19 countries, American Tower is the world’s largest provider of communications assets. It is also the largest REIT by market capitalization at $121 billion.

Rent communication sites from major communication operators like T-Mobile and AT&T is not an exciting business model, but it is extremely profitable. Since its IPO in 1998, the company has delivered an annualized return of approximately 12%, far exceeding the S&P500 during this same period. And thanks to the deployment of 5G technology, its growth is accelerating.

Although 220,000 is certainly a lot of communication sites, the company is far from being at market saturation, especially with its global markets. Global adoption of 5G in American Tower’s current communications sites is expected to be complete by 2025, and the company continues to expand its 4G presence in more emerging economies. It also benefits from the fast-growing data center industry, the latest addition to its portfolio after acquiring CoreSite in 2021.

The company has abundant cash, low debt ratios and a very conservative payout ratio. Like Prologis, its 2.1% dividend yield isn’t exceptional, but given its global dominance in this fast-growing sector, it’s a long game that should reward investors well.

A massive portfolio and significant risk

Annaly Capital’s whopping 13% dividend yield should be a telltale sign that all is not well with this massive mortgage REIT (mREIT) — and that’s probably about right. Investors should consider serious concerns about its growth opportunities.

Unlike other mortgage REITs, Annaly Capital does not originate loans. It buys large pools of agency mortgage-backed securities, earning a profit on interest while servicing mortgages. Today, it has more than $82.3 billion in assets as the industry’s largest mortgage REIT.

mREITs are very sensitive to market changes, and today’s volatile market is a difficult environment to navigate. Fluctuations in interest rates impact a business’ cost of borrowing, making it more expensive to purchase new loans. High inflation is also eating away at her income as more than 50% of the loans she earns interest on are fixed rate mortgages.

To combat these headwinds and continue to grow revenue, the company needs to buy more loans. This puts Annaly in an increasingly vulnerable position in the event of a recession. Mortgage defaults are a common result of a recession, straining the business. Fewer investors are interested in buying mortgage pools, especially agency loans, because they typically have higher levels of default than other loan types, limiting liquidity options.

Annaly’s debt ratios are better than other mortgage REITs, but it still has considerable debt on its balance sheet given the weakening economic conditions. It should also be noted that Annaly has steadily cut its dividend since the Great Recession. That’s why those looking for opportunities for growth and reliability will want to look elsewhere.

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