An Investment Guide to War With North Korea

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
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Buy to the sound of cannons, sell to the sound of trumpets.” - Lord Nathan Rothschild

President Trump and North Korean Supreme Leader (or whatever the heck he calls himself) Kim Jong Un have been talking tough and perhaps bringing the two nations to the brink of war.

We should never lose sight of the fact that war inevitably means death and misery for many innocent people.

That being said, Investment U is not a political site, it’s an investing site. And many of our readers want to know if they need to get defensive with their investments... or if there will be buying opportunities if war breaks out.

You may be familiar with Lord Nathan Rothschild’s famous quote above. Often, when war breaks out, investors take their risk off the table by selling their investments. They’re understandably worried about the worst happening.

But for those who can handle some added risk and volatility, it’s usually a good time to pick up those beaten-down investments.

So here are some investment ideas to consider if Kim Jong Un is stupid enough to keep poking the U.S. with a stick...

Real Estate

There are two reasons I like real estate if war breaks out.

Investors will likely flee to safety, which means buying U.S. Treasurys. As a result, the yield on Treasurys should decline, and that should bring down mortgage prices.

Additionally, some potential homebuyers may get scared off and decide to wait until things calm down to make such a major purchase. Less demand means prices will fall.

So real estate buyers may be able to pick up houses cheaper and with lower interest rates on their mortgages.

Defense Contractors

This one is a bit obvious... but these companies should do well.

Each Tomahawk missile made by Raytheon (NYSE: RTN) - the kind dropped on Syria earlier this year - costs about $1 million.

We fired 59 missiles at Syrian targets in what was essentially a slap on the wrist for the Assad regime. If we’re looking to really slap Kim Jung Un around, there will be a lot more than 59 missiles dropped on his weirdly coiffed head.

That would likely lead to big orders from Raytheon and other contractors that provide weapons, technology and services to the U.S. government.

Biotech

I’m a big fan of the biotech sector in general. With the baby boomers hitting their senior years, the demand for existing drugs and new cures is going to be enormous.

What I like about the sector is that it is completely uncorrelated with a potential war with North Korea.

If North Korea attacks Guam, or the U.S. military bombs Pyongyang, it should have no impact on whether Amgen (Nasdaq: AMGN) sells one more dose of its anemia drug Aranesp, or whether an early-stage company like Sage Therapeutics (Nasdaq: SAGE) will show that its postpartum depression drug is safe and effective.

The products produced by biotech companies are recession-proof and, for the most part, immune to geopolitical conflict.

The last time America went to war, when the U.S. invaded Iraq in March of 2003, both the S&P 500 and the biotech sector performed well, but biotechs more than doubled the performance of the broad market.

Three months after American troops landed in Iraq, the S&P had gained more than 13%, and the biotech sector had soared more than 31%.

After six months, the S&P was up 18%, while the biotech sector had gained 54%.

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While biotech can be volatile, I believe it will generate the greatest returns over the long term of any sector in the market. The sector is constantly innovating with incredible new discoveries, alleviating suffering and saving lives.

Should hostilities with North Korea heat up, look at any sell-off as an opportunity to buy quality investments at temporary discounts.

Of course, that’s assuming it’s conventional warfare. If either leader loses his damn mind and launches a nuke, then your investments are probably the least of your concerns.

Good investing,

Marc

Thoughts on this article? Leave a comment below.

Reliable Dividends for Uncertain Times

Marc Lichtenfeld’s Oxford Income Letter provides subscribers with a reliable stream of income, largely from companies with stable or rising dividends.

Several of these companies are real estate investment trusts (REITs). As Marc said, real estate tends to be a good buy in times of war, instability, and other economically uncertain conditions.

W.P. Carey (NYSE: WPC) is a great example of a reliable, dividend-raising REIT. Here’s Marc checking on the pick back in April...

W.P. Carey has been in our Compound Income Portfolio and Instant Income Portfolio for several years. It pays a 6.3% yield, which is nice. But even better, it raises its dividend every quarter.

The company has increased its dividend for an incredible 53 quarters in a row, excluding special dividends. During that period, its dividend has grown at an annual rate of a little less than 7%... more than enough to outpace inflation.

It’s also raised its dividend every year since 1999.

W.P. Carey is a real estate investment trust that owns 903 commercial properties around the U.S. and Europe. Its occupancy rate is 99.1%, meaning that less than 1% of its properties are vacant. Its average lease lasts more than nine years.

Thirty percent of the company’s properties are industrial facilities, 25% are office spaces, followed by retail, self-storage, warehouses and others.

In 2016, W.P. Carey generated $5.12 per share in adjusted funds from operations (AFFO), a measure of cash flow for REITs. It paid out $3.93 per share for a payout ratio of 77%.

In other words, for every $1 in cash flow that was generated, W.P. Carey paid out $0.77.

For 2017, management expects AFFO to rise to the $5.10 to $5.30 range. So, even if the company continues boosting its dividend every quarter, it should have no problem affording it.

Going forward, two-thirds of W.P. Carey’s leases are tied to inflation. If inflation picks up from the miniscule 1% or so of the past several years, we should see revenue and AFFO increase further, especially as the economy gathers momentum. And this will likely fuel even larger dividend hikes.

- Samuel Taube with Marc Lichtenfeld

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