Co-authored with “Hidden Opportunities.”

Steve Eisman is one of the handful of investors who famously profited through his prescient bets against collateralized debt obligations that caused the Great Financial Crisis of 2008. Portrayed by Steve Carell in “The Big Short,” Mr. Eisman is currently the managing director at Neuberger Berman, a private investment management firm.

Mr. Eisman was recently interviewed to discuss monetary policy, its effects on the markets, and his investment strategy. He believes that the era of hyper-growth investing is over and that the debt market and “old economy” stocks are the place to be.

The budget from the Biden Administration’s Infrastructure Investment and Jobs Act (“IIJA”) focuses on modernizing and improving various aspects of American infrastructure, from roads and bridges to broadband and clean water. The Inflation Reduction Act (“IRA”) aims to improve the stability and efficiency of the power grid and increase access and affordability of home energy efficiency and electrification projects. These historic legislations will bring hundreds of billions of dollars over the next decade into critical sectors of the American economy. Mr. Eisman expresses his bullishness on these “old economy” stocks like construction, utilities, and materials, describing it as the “revenge of the old school.” All these sectors are some of the traditional older ones that our grandfathers used to allocate a large proportion of their retirement portfolio to.

Mr. Eisman also said that he is buying bonds for the first time in his 30+ year investing career.

The U.S. government’s recent massive spending initiatives have barely kicked off, and there are enormous mid-long-term opportunities in road building, factory building, automation, and utility companies. The cash infusion from the government is set to rise in 2024 and 2025 and is yet to reflect on underlying companies’ earnings.

“What does Vulcan Materials do? It makes rocks. This isn’t the nitty-gritty technical aspects of AI. The fundamentals of these companies are not difficult to understand, and they will tend to have the wind at their backs.” – Steve Eisman.

We view that Mr. Eisman’s investments are wise and likely to be big winners in today’s environment. We also see a big opportunity in bonds as interest rates are likely to have seen some of the highest yields, and lowest prices recently. In alignment with Mr. Eisman’s perspective, our Investment Group is actively acquiring deeply discounted fixed-income assets and high-quality funds within the utility, infrastructure, and materials sectors. Fixed income investments does not only include bonds, but also “preferred stocks” which have become increasingly cheap and the yields very attractive. As income investors, we have been actively recommending to our members many such investments. Here are some of our standout selections:

1. Preferred Securities

Gladstone Commercial Corporation (GOOD) is a Real Estate Investment Trust (“REIT”) that primarily focuses on acquiring, owning, and managing office and industrial properties across the United States. This segment will see a significant boost from the reshoring priorities, and GOOD has impressively maintained consistent occupancy greater than 95% since its inception.

95% of GOOD’s debt is fixed or hedged, protecting the REIT against further rate increases. GOOD also repurchased $1 million of its common stock during Q2 2023, indicating overall comfort with the current liquidity situation and commitments.

We like GOOD’s property portfolio and find safer income prospects in its deeply discounted preferred securities – GOODN and GOODO. These present up to 8.6% yields and offer up to 43% upside to par value.

2. Baby Bonds

B. Riley Financial, Inc. (RILY) is a diversified financial services firm that is quite omnipresent in everyday Wall Street activities, with services like asset management, equity offerings, distressed lending, consulting, appraisals, liquidation, and bankruptcy restructuring. The company is present in sickness and in health of companies of all sizes, and several of its business segments experience tailwinds from a weak economic outlook.

RILY has a series of attractive fixed-income securities, including 7 baby bonds with a range of maturities 2024-2028, all with Yields-to-Maturity of 10-13%. RILYT is notable among them, offering up to 34% upside to par and presenting an impressive 8% current yield. RILY’s business execution provides ample coverage to the debt and preferred shareholder obligations, leaving a healthy reserve to cover the sizeable common stock dividend. It helps to know that management owns more than 50% of the common stock, ensuring that the business decision-making will be aligned with the interests of shareholders.

3. Closed-End Funds

With billions flowing into domestic manufacturing, infrastructure, and clean energy initiatives over the next decade, we identify some targeted CEFs to draw large income from the tailwinds to these sectors.

BlackRock Resources & Commodities Strategy Trust (BCX) offers a diversified investment opportunity in the sectors of Energy, Mining, and Agriculture, strategically positioned to capitalize on the growing significance of essential raw materials and industrial feedstock (basic materials and commodities). Source.

Basic materials and commodities are one of the typical “old school” sectors. BCX‘s top holdings are leading Exploration and production companies that are experiencing solid tailwinds from elevated crude oil prices. The CEF primarily invests in large, well-established commodity companies, with over 90% of its portfolio comprising companies exceeding a $10 billion market cap. The fund generates excess income by writing covered calls on approximately 1/3rd of its portfolio.

BCX pays monthly dividends, yielding 7% annually, and trades at a bargain 15% discount to NAV.

• Utilities and Infrastructure

Reaves Utility Income Trust (UTG), yield 9.5%, is a CEF providing diversified access to major utility firms in the U.S. This industry experiences inelastic demand through economic cycles, and companies enjoy strong competitive advantage; they operate in markets with significant barriers to entry, such as high capital requirements and government regulations, limiting the threat of new competitors.

UTG has been growing its monthly payments since its inception in 2003 and offers investors a fat and safer stream of income. Utilities tend to be defensive stocks, and have done well in the past in both good and bad times, including past recessions, because demand for utilities is relatively inelastic, as people need electricity, water, and other basic needs no matter what.

Conclusion

Our investment strategy is underpinned by a substantial 40% allocation to fixed-income securities, carefully curated across a diversified portfolio that includes over 65 preferred securities and baby bonds. Furthermore, our investments in CEFs and ETFs bolster our presence in the deeply discounted preferred segment.

Inspired by the insights of “The Big Short,” investor Steve Eisman has shifted his focus to the debt market and “old economy” stocks in light of expansive government spending. We share a common vision and are capitalizing on discounted market opportunities to enhance our income stream.