Rent Inflation and a "Housing Gap" Puts a Buy-Now Bullseye on This Stock
If you're a renter, inflation remains a hated enemy.
But using TradeSmith's pioneering analytics, we can turn that hated enemy into an ally.
And here today, I'm going to give you a “rent-inflation winner” to put on your watch list.
But, first, let's consider the whole story…
The Renting and Inflation Connection
The latest Consumer Price Index (CPI) report contained an intriguing contradiction: While overall inflation may be cooling, housing inflation remains “stubborn.”
That latest CPI reading, released last Tuesday, said that shelter inflation climbed from 0.4% in April to 0.6% in May.
Overall, shelter costs were less than April's costs but still up 8% from a year ago:
For investors like us, this is more than a mere data point.
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As a company — we've never offered a cash payout strategy quite like this. Especially not one that is as straight-forward as this.
In fact, all you've got to do is check your inbox at 12 p.m. Eastern every day and, if you choose to act, within five minutes you can have your up-front cash directly deposited to your brokerage account.
While some economists are expecting a calming in rent prices, the reality is that landlords will have pricing-power muscle for a long time to come.
As of June 15, the national average for an interest rate on a 30-year fixed mortgage rate was 7.06%. That's more than double the lows below 3% we saw back in 2021.
And it means that a lot of folks just can't afford to buy a house right now. And if you can't buy (and can't move back with your parents), you have to rent.
The cherry on top of that is you have to give in to whatever a landlord is demanding for a monthly rental.
That's not academic theorizing: Data from our friends at LikeFolio shows renting is going to be a trend for the foreseeable future.
The LikeFolio folks like to say that Main Street knows before Wall Street moves — and this is a perfect case study of what they mean.
Look at the chart below:
Chatter about rental property started to climb at the outset of this year. And people are talking about rental properties 26% more year-over-year (YoY).
In contrast, mentions of buying a home are down a gut-wrenching 32%:
The “real people” out there are sharing a narrative that in no way points to rental costs dropping anytime soon.
Here's another little tidbit — a piece of Econ 101 insight that bolsters our thesis.
Let's call it the “housing gap.”
And it's big.
Between 2012 and 2022, the number of new “households” that were formed (15.6 million) beat the number of new single-family homes completed (9.1 million) by 6.5 million.
Demand grew more than supply. Which means prices for new homes rise.
Add in the fact that consumers don't have cash — personal savings are hovering around 4%… less than half of a decade-long average of roughly 8.9%, meaning there's less available for down payments… and you've got all the ingredients for a continued hot rent market.
Armed with that information, we can turn to our Health Indicator to see which companies are considered in a “healthy investing state” to find opportunities in the rental space.
And just such an opportunity triggered an Entry Signal at the end of May.
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American Homes 4 Rent (AMH) is a real estate investment trust (REIT) that offers investors a “slice” of the American Dream.
Housing communities with fenced yards, pristine lawn care, a 2-car garage, and dog parks for your four-legged family member.
AMH calls itself a leading owner, leasing operator, and a build-to-rent developer for single-family properties, with nearly 58,000 single-family properties across the United States:
Source: AMH Investor Highlights June 2023
AMH also shared in its recent earnings report that it estimates rental payments are 26% cheaper than monthly home ownership costs — and that millennials are “aging” into their “single family living years.”
And with Millennials surpassing Baby Boomers as America's largest generation in 2020, you're looking at a strong tailwind for AMH over the next few years as can be seen in the graph to the right below:
So it's not surprising our Health indicator recently gave this company the “green light.”
Our Health Indicator was set up to see at just a glance whether a company is worth investing in, with a green-, yellow-, and red-light system. If it's green, it's considered in a healthy investable state.
AMH triggered an Entry Signal on May 30 and is in our Green Zone.
Our Volatility Quotient (VQ) also lets you know at a glance an associated risk level with an investment.
AMH is considered a “Medium Risk” at 19.60%.
To round it all out, AMH is also able to pass along income to you in the here and now in the form of dividend payouts, with a payout of 88 cents a share that, as of this writing, works out to a 2.5% yield.
It's one of those combinations you don't see every day where a company can offer the impressive one-two punch of stock-price growth thanks to a surging business and a healthy income stream.
If you'd like to learn more about our friends at LikeFolio and how they have been using real-time data to highlight investable opportunities, you can do so here.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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