Some investors focus all of their attention on good news, which is fine. But there are times when bad news offers up great investment opportunities as well. That's a contrarian approach, but it will probably feel appropriate for value investors.
Right now the trend of rising interest rates has opened opportunities in the real estate investment trust (REIT) arena. And a cyclical downturn in the chip sector has done the same in the high-tech space. Here are two ways to play these big trends if you have $10,000 to invest today.
Rising rates take REITs down
Interest rates have risen dramatically over the past year. That's increased competition between things like CDs and income-focused investments like REITs. Why bother with risky stocks if you can get a 5% yield from a CD? (The answer is a lack of income growth.) From a business perspective, meanwhile, rising rates make it more expensive for REITs to grow because interest costs go up. There's a reason why the average REIT, using Vanguard Real Estate Index ETF(NYSEMKT: VNQ) as a proxy, is down around 30% from its early 2022 highs.
Image source: Getty Images.
But property markets will eventually adjust to the higher rates, as they have before. That will lead to a return of attractive property investment opportunities, and likely industry consolidation along the way. If you see this downturn as a temporary setback, which is likely what it will be, then you might want to step in and buy the REIT industry's biggest and best companies while they are on sale.
There are a number of good options. For example, Realty Income(NYSE: O) is three times the size of its next largest peer and just agreed to buy smaller competitor Spirit Realty(NYSE: SRC). That comes after the earlier acquisition of VEREIT. With a historically attractive yield of 5.7%, now could be a good time to buy this net-lease giant.
O Dividend Yield data by YCharts
Although Realty Income is particularly enticing today, it isn't the only attractive REIT. You might also want to look at bellwethers like Prologis(NYSE: PLD) in the industrial sector, AvalonBay(NYSE: AVB) in the apartment niche, and Simon Property Group(NYSE: SPG) in the mall space. These are all large, well-respected REITs with strong operating histories. Each has been hit hard during the REIT sell-off, perhaps signaling a contrarian buying opportunity in a sector known for producing reliable dividends.
Chips go into everything
One of the hot stories today is artificial intelligence, or AI. There are microchip makers that are seen as a way to specialize in the space, and they are in high demand. Think Nvidia(NASDAQ: NVDA). But more broadly, the chip sector is in a funk. That's normal -- the industry tends to be cyclical. As a comparison, consider the meager returns provided by Texas Instruments(NASDAQ: TXN) in the graph below compared to the meteoric rise of Nvidia's stock.
But here's the interesting thing: The boring chips that Texas Instruments makes go into just about every digital product. To simplify, Texas Instruments' chips turn physical events, like a button push, into a digital signal. You need this industry giant's products to interact with technology, and digital products are increasingly important in the world. That is why it should be interesting to see that the stock's 3.3% dividend yield is near historic highs, suggesting it is on the deep discount rack.
Most investors wouldn't associate chips with dividend stocks, but Texas Instruments could be the exception (and an opportunity). Notably, the dividend has been increased annually for 20 years and at an annualized rate of more than 15% over the past decade. If you are a dividend growth investor, the chip downturn could be presenting you with a big buying opportunity in Texas Instruments.
Note too that management is investing in new chip production so it comes out of this downturn a stronger company. That's a sign that the company sees a bright future for chips and that it has the foresight to prepare so it can take full advantage of the next industry upcycle.
Bad news can help you find good investments
While other investors are focused on all of the good trends, you should consider going contrarian. Take a few moments to see if there are any investment opportunities in the bad trends. Right now the downturn in REITs is opening up a chance to buy industry-leading names like Realty Income. And AI has investors focused on a small number of chip makers even as the rest of the industry is muddling through a weak patch. That has opened up a chance to buy an iconic name like Texas Instruments while it has a historically high yield.
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Reuben Gregg Brewer has positions in Realty Income, Simon Property Group, and Texas Instruments. The Motley Fool has positions in and recommends Nvidia, Prologis, Realty Income, Texas Instruments, and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool recommends AvalonBay Communities and Simon Property Group. The Motley Fool has a disclosure policy.
