These aggressive measures are paying off, with the Federal Reserve raising short-term fed funds rates 11 times in the past 18 months to a range between 5.25% and 5.5% – their highest level in 22 years. Inflation has continued to slow this year, with annual growth in the consumer price index falling to 3% in June, the lowest point since March 2021.
However, despite these positive results, billionaire Howard Marks is sounding a warning to US companies. In a recent Bloomberg interview, the founder of $179 billion Oaktree Capital Management warned that these sky-high interest rate hikes are going to hit businesses hard. As borrowing cash becomes more expensive, he predicts that more companies will default on their debt payments.
“When you go through a period where it’s very easy to raise money for any cause or purpose, and you go into a period where it’s difficult to raise money even for a good cause, it’s clear that a lot more companies are founded.” Comment.
While Mark worries about the economic impact of higher interest rates, he suggests his investment portfolio is well-positioned to weather further economic challenges. Mark has major holdings in two major products Divided sharesOne of them yields a solid 11%.
Actually, it’s not just brands that support these names. Using Tipranks database, we find that both are rated as ‘Strong Buy’ by the analyst consensus. Let’s take a closer look.
Sitio Royalties Corp. (STR)
For the first time, we get a low discount on Sitio Royalties, a company specializing in the management and monetization of mining and royalty interests in the energy sector, certified by Marks.
Its core business model is focused on acquiring and holding interests in oil, natural gas and mineral rights, allowing the company to benefit from the production and exploration activities of energy companies. Leveraging its extensive knowledge of the energy industry, Sitio strategically invests in assets with significant resource potential, generating a steady stream of revenue through royalty payments.
Currently focusing on high-quality U.S. basins, the company has made more than 190 acquisitions, with more moves underway this year. In its recent Q2 earnings call, the company said it had closed several approved Permian Basin acquisitions totaling $247.9 million since the end of Q1. Sitio made these acquisitions with 27% equity and 73% cash.
The latest reading, however, was not entirely positive. Revenue rose 50.2 percent year-over-year to $136.46 million, missing consensus estimates of $8.84 million. Additionally, with $25.6 million in cash non-impairment charges, the company recorded a net loss of $3.0 million for the quarter, a decrease of $50.7 million compared to 1Q. The company lowered its dividend payout from $0.50 to $0.40 per share, though it still yields a healthy 6.07 percent.
Meanwhile, Mark is heavily invested here. He owns 12,935,120 STR shares, which currently has a market value of about $341 million.
Stifel analyst Derek Whitfield is also on board and sees a lot to like about the firm. He wrote, “In our view, Sitio provides exposure to the best geology of the Lower 48 while maintaining geographic and operator diversification. In terms of quality, Sitio provides investors with scale and a special focus on obtaining low supply costs by quality operators in the heart of major oil fields. In our view, the company’s highly targeted acquisition strategy provides a good outlook for near- and medium-term development opportunities regardless of commodity volatility and the political environment.
“Overwhelmingly, we estimate that Sitio can return 100% of its enterprise value by 2030, which is highly valuable now and has potential for the future. Overall, the company’s technical expertise and ability to leverage near-term approval deals with land play capital provide a unique investment opportunity,” added Whitfield. .
Accordingly, Whitfield has a Buy rating on the stock and a $33 price target, giving it a 25 percent return over the next 12 months. Based on the current dividend and expected price appreciation, the stock has a ~31% total return profile (see Whitfield’s track record, Click here)
Overall, two other analysts have recently weighed in on STR reviews, and both are also positive, making the consensus view a strong buy here. The $32 average target is slightly lower than Whitfield’s objective and is 21% above current levels. (look out STR stock forecast)
Oaktree Special Loan (OCL)
Next on our Marx-backed list, we have Oaktree Specialty Lender. As the name suggests, this business development company (BDC) operates in the world of specialty finance and lending, focusing primarily on providing customized financing solutions to mid-market companies in a variety of industries.
As the name suggests, it is managed by Oaktree Capital Management, which was founded by Howard Marks, who took over BDC in October 2017. Here, Marx’s holdings stand at 1,852,456 shares, which represents more than $37.4 million at the current share price.
The Company’s investment portfolio consists of a variety of debt instruments, including senior secured loans, subordinated debt and equity co-investments, allowing it to tailor its financing offerings to meet the unique needs of its clients. OCSL has a diverse mix of companies in its portfolio, with software leading at 18%, followed by specialty retail at 5.2% and real estate management at 4.4%.
On the financial side, credit metrics suffered in the recently recorded fiscal third quarter (June quarter) as uncollected investments increased. Although total investment income grew 61.5% year-over-year to $101.9 million, the figure just missed Street expectations — by $0.73 million. Adj’s EPS of $0.62 also slightly missed analysts’ forecasts by $0.01.
However, that still manages to overshadow the main appeal here: a very salty split. The quarterly payout currently stands at $0.55, yielding ~11 percent.
While aware of the issues that slightly marred its Q2 performance, KBW analyst Ryan Lynch points out why this stock should be watched closely.
“OCSL generated a strong operating ROE of 12.6% and a healthy net income ROE of 9.7%, albeit slightly higher on non-extremists,” Lynch noted. “While OCSL has made substantial gains over the past two quarters, we remain confident in the platform’s strength and track record…Oaktree has a strong, deep and successful track record, navigating difficult times and investing well to navigate this uncertain environment.”
These comments confirm Lynch’s Outperform (i.e. Buy) rating on OCSL, which is supported by a $22 price target. The figures suggest that shares will rise ~9% in the coming months. (For Lynch’s story, Click here)
Overall, OCSL shares have a strong Buy consensus rating based on 3 Buys and 1 Hold. The average target of $21.38 indicates only a modest 6% gain for the next year, but with ~11% yield, this figure rises to a respectable 17%. (look out OCSL stock forecast)
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Disclaimer: The opinions expressed in this article are those of the featured analysts only. The content is intended for informational purposes only. It is very important to do your own analysis before making any investment.
