HCP/OHI (SELL/BUY)

 

 

question markThe whole Brexit fiasco is becoming a distant memory as the market has more than recovered its losses over the past few weeks.  As a matter of fact is has recovered so well that the DOW and S&P 500 have both reached record highs.  It is becoming increasing difficult to find fair-valued stocks the past few days, as the DOW has now surged well over the 18,000 mark.  This is where an investor has to really dig into individual companies to search for stocks that appear to be undervalued or pulling back for some reason.

This is exactly what I did and I found a great opportunity.

On July 12, 2016, I sold all 20 shares of HCP, Inc. (HCP) for net proceeds of $738.97.  I immediately reinvested all proceeds into additional shares of Omega Healthcare, Inc. (OHI), purchasing 23 shares at $32.98, plus 4.95 commission, for a total of $763.49.

I am really pleased with this transaction for several reasons.  HCP is going through a bit of a rough patch right now as they prepare to spin off a portion of their real estate portfolio, mostly associated with HCR ManorCare.  To be brief, HCR ManorCare is being investigated by the Department of Justice for inappropriate billing.  HCP’s plan is to spin off the HCR properties and make them their own entity.  HCP shareholders are to receive shares in this new company.  I don’t want to hold shares in this new company, even though the properties were part of HCP’s portfolio.  It’s a bit different when trouble locations in a portfolio are surrounded by other real estate locations that are performing well.  This spin-off will impact the dividend, with many stating the dividend will be effectively reduced.  The bottom line is that HCP is no longer the SWAN (Sleep Well At Night) stock that I desire.

Another red flag for me was the CEO, Lauralee Martin, leaving the company.  It has been stated that she retired; however, she received a $14 million dollar severance package.  That is truly odd to retire and receive such a package.

OHI, just like HCP, is in the REIT – Healthcare Facilities industry.  Current market conditions are favoring OHI as a better growth prospect than HCP, which is evident with OHI having a stronger BUY rating than HCP.

The timing of the purchase was exceptional.  Even though the DOW was in the green over 100 points, for some strange reason OHI was having a significant down day, ending the session down over 4%, while HCP was up about 1.5%.  I mercifully exited my HCP position with very tiny 2.7% cap gain (5.2% w/dividends included).  I was able to lower my cost basis in OHI, not to mention I was over 8% in the red on this position (not including dividends).

The impact on future dividend income is a minimal increase.  HCP paid a 0.575 cent quarterly dividend while OHI paid 0.58.  Selling 20 shares of HCP and purchasing 23 shares of OHI effectively added about $7.36 to my annual dividend income, all without hardly adding any additional capital.

The near term brings a high level of uncertainty with HCP – will the dividend be cut?  How will the new spin off company perform once it hits the market?  Will the total dividend by both companies equal what HCP was originally paying?  Will HCP keep its Aristocrat status?  Once the dust settles I will revisit this company, as I still have a positive outlook on the industry that deals with an aging population.

I now own 51 shares of OHI, which now stands as my largest individual stock investment.  My ideal position is 100 shares, which allows me to sell Covered Call options, so OHI is now considered a half-position.

What about you?… Have you seen any other great opportunities out there?





Leave a Reply

Your email address will not be published. Required fields are marked *