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Interest rates are going higher, and the predictable consequences are playing out right now in the stock market.
I know that the talking heads have been saying that the economy will slow markedly, and the Fed might be able to pause the string of rate hikes by the end of summer.
I wouldn't bet on it.
Jerome Powell is the Chair of the Federal Reserve. He and the other members of the Open Market Committee have made it clear that getting inflation back under the long-term target of 2% is their most important task and will be until that target is reached.
The other part of the Fed's mandate is full employment. We're well on our way there, with no signs that the job market will weaken anytime soon. In fact, the unemployment rate is just 3.6% right now, and it's not leading to an ease of any inflationary pressures.
That leaves hiking interest rates as the Fed's only other option - wishing and hoping will not stop it from happening. I don't know if inflation has peaked or not. Still, even if it has, that doesn't mean that we will suddenly see wage inflation reverse, nor will it magically fix our supply and demand imbalances, especially in the energy sector.
If the Fed has to slow the economy down to gain control of inflation, it will do so.
If the markets drop because of the rate hikes, the Fed will let them fall.
That means investors need to find creative solutions to weather the downturn, by reinvesting in assets that will benefit from rising rates.
And I've recently found a real corker of a stock that I think will do just that. It's a lending company with a large, diverse portfolio, offering a high cash return and potential capital appreciation with a huge margin of safety.
Let me tell you all about it...
Why Blackstone Is the Perfect Place to Park Your Money Right Now
Blackstone Secured Lending Fund (NYSE: BXSL) is a Business Development Company that invests in first lien senior secured debt of private U.S. companies.
Ninety-nine percent of the portfolio is floating rate. If rates go higher, so will the payment Blackstone will get from borrowers, and that cash will get passed along to us as shareholders.
Over the years, I have become a big fan of business development companies and other publicly traded finance and mortgage lenders associated with top-performing private equity funds like Blackstone.
In the 37 years the firm has existed, Blackstone has borrowed enormous amounts of money to buy companies, real estate, and infrastructure projects worldwide.
They have put what they learned as borrowers to work as lenders. Blackstone Credit now has more than $230 billion in assets in loans, high-yield and investment-grade bonds, structured credit, mezzanine lending, and opportunistic and distressed financing.
The same professionals that invest for Blackstone's high net worth and institutional clients are helping manage the portfolio at Blackstone Secured.
In addition to the floating rate feature, several other things about the portfolio's composition create a large margin of safety for Blackstone Secured investors. First, the most significant industry allocations in the portfolio are healthcare providers and software companies. Neither of those is likely to see any slowdown in sales, even if we see the U.S. economy weaken in the second half of 2023.
The rest of the portfolio is diversified across 23 different industries. Borrowers include 152 companies.
Ninety-seven percent of investments in first lien senior secured debt, and the loan to value ratio is just 44%, so it's highly likely Blackstone gets its money back even if the borrower should default on any one issue. That's not too much of a concern, as 100% of the loans in the portfolio are performing as agreed.
In case I'm dead wrong and interest rates don't go higher, we're still in a fantastic position as Blackstone Select shareholders.
We will own a diversified loan portfolio managed by one of the most successful investment firms in history that is yielding 8.6% right now. At the current price, we are only paying about $0.95 on the dollar of the loans and cash in the BDC.
In addition to the $2.12 regular dividend Blackstone Secured has paid special dividends almost every quarter of its existence. Last year, the total payout yield was 9.2%.
Blackstone Secured has a solid balance sheet with plenty of liquidity. At the end of the first quarter, the BDC had $710 million of liquidity in cash and undrawn debt. They are one of a handful of business development companies that get an investment-grade rating from both Fitch Ratings Service and Moody's.
I don't run across too many investments that offer a dividend payout like this as well as such great potential to protect your cash from inflation and higher rates. So when we find one like Blackstone Select, I think it's a no-brainer buy.
It's more important than ever for investors to find ways not only to preserve existing capital but position themselves for the best gains when markets recover. Because they also can benefit from higher interest rates, banks are one area where investors are taking refuge.
But there are two additional key market sectors where a new flood of buying is going to create opportunities for potentially massive profits, especially in small-cap stocks that often get overlooked by the major players.
Money Morning Chief Investment Strategist Shah Gilani has a strategy to narrow thousands of these stocks down to the few with the biggest potential to be the next market winners.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth."