Aptus Capital Advisors Portfolio Manager David Wagner joins Yahoo Finance Live to discuss some of his preferred stock trades: Buy Lennar (LEN) and UnitedHealth (UNH), sell utilities (XLU) and Vanguard's Real Estate Index Fund (VNQ).
Homebuilder Lennar's stock is on the path to reach new heights in 2023, closing at an all-time high of $133.24 on July 14. Wagner calls the homebuilder company the "alpha architect" in housing buydowns that see homebuyers squeezed out of markets due to mortgage rates. Next is UnitedHealth Group, whose stock price sits above $500. The health care provider may be "one of the highest quality stocks in the S&P 500" while positioned to utilize AI in its data.
Wagner outlines how the utilities sector, with its defensive nature, could be competing with Two-Year Treasury Yields. "It's the most expensive house in the most expensive neighborhood," Wagner said of utilities' position in the S&P 500. Lastly, Wagner takes on the commercial real estate sector, warning that there could be "more degradation in the valuation of these securities." As housing market and banking pressures weigh on the commercial real estate market, brokers aren't "going to take these projects on, so you're not going to have growth in that."
Video Transcript
SEANA SMITH: All right, David, let's talk about it because you brought some specific picks, some advice here for investors. You also have two names that you're saying that investors should avoid right now. So let's get into that. David Wagner of Aptus Capital Advisors, Portfolio Manager.
David, let's start with your first pick, and that's a homebuilder play. Clearly, we have seen the homebuilders get some momentum as some of the inventory constraints within the housing market. Potential buyers are left with new construction almost as the only option right now. Your pick is Lennar. Why does that stand out in the group?
DAVID WAGNER: Yeah, it's actually more of a whole macro play for the entire group. I think when we started-- when I started looking at these stocks back in May, I was definitely a contrarian. But you know, Seana, you hit the nail on the head from a macro perspective. That resale market that you're seeing out there right now is obsolete. There's nothing there.
I think the year-over-year number on the resale inventory was down like 21%. So that allows these homebuilders to start taking market share. But not only that, look what Lennar was doing. They were, kind of, the alpha architect of this mortgage rate buy down system, which is definitely, kind of, an industry standard right now.
We know that the 30-year mortgage rates are closer to, say, 7%. But they're offering these buyers 4 and 1/2%, 5% right now. So how can people turn that down? So what they're doing is they're basically creating a competitive moat around the entire industry that was once considered to be very commoditized in a way. So even at valuations of 1.8 times book, I'm still very bullish here because I just see the runway for growth continuing for quite some time.
AKIKO FUJITA: Another stock you like is UnitedHealthcare. Walk me through your thesis there.
DAVID WAGNER: Yeah, with homebuilders there's more macro, and I'm a fundamental investor at heart. And this is straight valuation here right now. If you actually look at UNH last year, they're trading about a 30% premium to the market. Right now they're trading at a 10% discount.
Basically, levels that we're seeing is during a period of Medicare for All back in 2013, 2014. So it's one of the cheapest times I've ever seen this stock on a relative basis, and it's far one of the highest quality stocks I've seen in the S&P 500 and obviously, number one in the healthcare industry for me.
I mean, look what the management team did to, kind of, diversify their book out of their insurance business into Optum. And now I think that they're starting to look for that third leg of growth that could come through some type of AI beneficiary. I know that's a buzzword, and we don't know when that's going to play out. But I do think in longer term, they have the abilities to utilize that AI, that data to decrease costs and increase volume. So you couple that alongside a valuation, what I think should be trading at maybe a 20% premium instead of a 10% discount, I think this stock is a no-brainer.
SEANA SMITH: Well, David, on the flip side, some of the plays that you're saying investors should avoid right now at all costs, one of that is the sector play. You're warning against utilities, a tough environment right now given those higher rates.
DAVID WAGNER: Yeah, Seana, I saw a statistic that actually really surprised me today that right now there's only 15 stocks in the S&P 500 that have a yield higher than the two-year treasury. And only one of them is actually a utility. And we've known historically that utilities tend to be very defensive in nature. They tend to be that yield play. But now there's a competition for income now with treasuries.
So there's no benefit, in my mind, for holding utilities for a lot of these dividend or retiree investors because you get a lower dividend yield and you get a valuation that's exorbitantly high relative to the S&P 500. It's almost like it's the most expensive house in the most expensive neighborhood, so I just don't see it showing the exact defensive characteristics that it has historically.
AKIKO FUJITA: And commercial real estate.
DAVID WAGNER: That's a tough place to be.
AKIKO FUJITA: We were talking about new homes, right? We're talking on the other spectrum of it. There's been so many doom and gloom scenarios there. What is your expectation on what's likely to come, especially when some of that debt is due?
DAVID WAGNER: Yeah, I mean, you're seeing a lot of default news basically on a daily basis. But what I try to do is I take the macro data but look at it from what is the stocks really pricing in right now? And I think there could be more degradation in the valuation of these securities, because right now there's not a long runway for growth for these companies. And then they have a weighted average cost of capital headwind that's really moving forward, one on the debt side because debt has become so expensive to a point where the debt is more expensive than the cap rates on a lot of these properties that they're trying to buy.
So that's a negative IRR type of project. So they're not going to these projects on. So you're not going to have growth from that. But you could also look at it from a valuation perspective. Yes, valuations have come down, but that means when they need to issue equity, because debt is so expensive, they're not going to be able to do it from a creative manner because it's really weird within REITs, especially or commercial real estate. You actually want a higher valuation, not a cheaper valuation because you want to use that as currency to issue equity out there to get basic cheaper weighted average cost of capital.
So right now I just see the sentiment in the space just being too heavy against it. So I'm definitely staying away here.
AKIKO FUJITA: Yeah, it's tough to find somebody who's positive on commercial real estate right now.
DAVID WAGNER: Maybe that's a pro.
AKIKO FUJITA: David Wagner, Aptus Capital Advisors Portfolio Manager. Good to talk to you.
DAVID WAGNER: Thanks for having me.
