There’s a FTSE 250 stock that’s just leapt to the top of my watchlist. Analysts say its earnings will triple next year. And interest rates could change everything.
As an investor I want to buy from pessimists when prices are low. Then sell to optimists when the market finally catches up.
That can mean shining a light into unloved areas of the stock market.
Added interest
Assura (LSE:AGR) is a real estate investment trust (REIT). Wait! Don’t turn away just yet.
At a beaten-down share price of 44p, I’d be paying a pittance for what I see as a potential big growth area. Assura’s price-to-earnings growth (PEG) ratio sits at 0.2. Below one is considered good value.
But in high interest rate environments, the value of the properties REITs invest in tends to fall.
Higher rates mean higher borrowing costs, too. So when UK rates were at 0.1%, as they were in December 2021? REITs looked a much better prospect. The dividend income they offered far outstripped near-zero savings income on cash. But the Bank of England’s 14 rate increases in a row, to 5.25%, changed all that.
Yes, REITs have been hammered by high interest rates over the last two years. Share prices have been crushed. But that could all be set to change.
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Signs and signals
For where interest rates go next, we can look at UK swap rates. These financial products track interest rate expectations.
They’re also used as a benchmark for how high or low banks think they should set their interest rates. And hence, how much REITs will pay to service their debt.
Swap rates have fallen below 4%, their lowest since May 2023. Britain’s biggest banks are starting to slash fixed-rate retail mortgages too.
Markets, traders, and investors alike are hoping that rates have already peaked. And if we see the Bank of England cut interest rates? Debt payments will fall. Stock markets will likely rally. And REITs will start to look a lot more valuable.
Health check
Assura is a little different from the crop of commercial or industrial REITs on the FTSE 250. I see less value in REITs exposed to those parts of the sector.
Instead, it owns and manages 607 properties in the UK with a focus on medical centres. These primary healthcare and diagnostic treatment buildings include GP surgeries and NHS community treatment centres.
This year Assura sank to a net loss of £110m in 2023 on revenue of £150m.
But analysts see the company swinging back to healthy £84.3m profit in 2024. And the stock pays a 7.5% dividend yield today.
If Assura has less to pay in interest on its £1.1bn of net debt? That potentially means more value returned to shareholders. And a slated 21% dividend hike in 2024 to 3.23p per share has me interested.
Bank on it
Taking advantage of this cycle means picking beaten-down stocks and shares that could respond to rapid cuts in interest rates. The risk in investing too soon, of course, is that interest rates don’t fall as far or as fast as I think. That would depress Assura’s share price.
But while forecasting the future with precision is impossible, I can still make educated guesses about which shares will gain the most in 2024 and beyond.
