The stock market is difficult to predict as several macro, industry, and company-specific factors drive the stock prices. The stock market volatility is the highest in the short term, as that depends on how investors react to the news. Fear is a stronger emotion than greed. Hence, you will see stock prices fall at a faster rate but grow at a slower rate. In the dynamic business environment, one can change one’s stance on a stock. You can become bearish on a stock you were optimistic about last month and vice versa.
The recent developments in the stock market have made me change my stance on a real estate-related stock.
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Why I am bearish on Dye & Durham stock
Dye & Durham (TSX:DND) is a legal practice management software provider that delivered strong growth year-to-date, surging 57% till December 13. The stock was rallying on recovery in the real estate market. Its Unity platform helps lawyers and banks with due diligence of property transactions. After two failed acquisitions, the company changed its strategy from growing through acquisitions to creating use cases for its property data across verticals. It could target banks, home insurers, and other parties that could benefit from the Unity platform.
However, I changed my stance on Dye & Durham to wait and watch after activist shareholder Engine Capital demanded nomination on the tech company’s board. I changed my stance to bearish as the leadership changed hands after the meeting.
The software company has a new interim chief executive officer (CEO) and new directors on the board. The new board has formed a CEO search committee. Until there is clarity on the leadership and the company’s roadmap, it is better to book profit while the stock is still trading above $19.
It is better to stay away from DND stock because it is the second time in three years that the company’s management conducted a strategic review. The earlier management discarded the option of a management buyout and stayed in the stock market. It remains to be seen if the new management has a similar view or takes the company private.
Why I am buying Timbercreek Financial instead
The Canadian real estate market is expected to recover next year as the government cuts immigration targets by 20%, bringing some relief to rising house prices. Moreover, the Bank of Canada cut interest rates to 3.25% in December. Economists expect the interest rate to fall to 2.75% by mid-2025 and 2.5% by the end of 2025.
All these factors will bode well for the short-term commercial mortgage lender Timbercreek Financial (TSX:TF). The lender has been witnessing a decline in its loan turnover ratio. Many real estate investment trusts (REITs) are not taking new loans, and those who took are repaying them to reduce their interest costs. The interest rate cuts are expected to revive demand for new loans. However, it is taking longer than expected as the accelerated rate cuts have encouraged REITs to wait for borrowing costs to fall.
The delay has inflated Timbercreek Financial’s third-quarter dividend-payout ratio to 95.3% of the distributable income. The fear of a dividend cut has pushed the stock price down 15% since November, inflating the yield to 9.89%. Even if the lender cuts the dividend by a third to $0.455, you will still have a yield of 6.5% at the current trading price of around $7. And when the lending turnover improves, the stock price could rally 15% to $8 and above.
The takeaway
Both stocks carry high risk. However, the latter has a lower downside risk than the former, making it a better option to invest in real estate recovery.
