Daily Stock Pick: August 27th, 2021

Stocks edged higher this morning in anticipation of remarks from Fed Chair, Jerome Powell.  Investors will be looking for signs pointing to when the central banks will begin to cut back its $120 billion monthly emergency bond purchases, possibly this year.  Volatility can be expected if there are any big surprises from central bank representatives today. 

“The Fed may start tapering its bond purchases soon. Which has caused a lot of angst on Wall Street and Main Street,” said Ally Invest chief investment strategist Lindsay Bell.  “While it hasn’t caused any big swings yet, the Fed’s plans may be tough to digest against a backdrop of rising infection rates and slowing, but solid economic data.  Plus, the market rarely stays quiet for this long.”

The tapering of the central bank’s $120 billion per month emergency bond-buying program is the first step in a process that will inevitably eventually lead to rising interest rates.  While the first rate hike may still be on the distant horizon, many investors are now looking for ways to prepare their portfolio.

Certain sectors are more sensitive to interest rate changes than others, which can create very attractive opportunities.  In today’s stock pick, we’ll delve into the sector that is perhaps most sensitive to these changes and reveal a ticker from within the sector that stands to benefit in the months and years to come.   

Stocks from the financial sector often benefit from higher interest rates through increased profit margins.  Specialty finance company Oaktree Specialty Lending Corporation (OCSL) provides customized, one-stop credit solutions to companies with limited access to public or syndicated capital markets.  OCSL generates income and capital appreciation by providing co companies with flexible and innovative financing solutions, including first and second lien loans and preferred equity.  

Ahead of rate hikes, companies that pay high dividends are often bought for the income they generate for investors.  Oaktree has been named a Top 10 dividend-paying financial stock by Dividend Channel in its most recent “DividendRank” report.  The report noted that OCSL displayed both attractive valuation metrics and strong profitability metrics.  The report cited OCSL’s low price to book ratio of 1.0 and their high annual dividend yield of 8.02%. By comparison, the average stock in Dividend Channels coverage universe yields 3.2% and trades at a price-to-book ratio of 2.7.  The report also cited the strong quarterly dividend history at Oaktree and favorable long-term multi-year growth rates in key fundamental data points.  

OCSL share price has climbed more than 16% over the past 6 months, which reflects the continued willingness to pay more for the potential upside.  Of 7 analysts offering recommendations for OCSL, all 7 rate the stock a Buy.  There are no Sell or Hold ratings for the stock.  A median 12-month price target of $7.75 represents a 7% increase from the current price.   

Where to invest $1,000 right now...

Before you consider buying Oaktree, you'll want to see this.

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