2 Monster Stocks to Buy Hand Over Fist and 1 to Avoid Like the Plague

Investing in monster-sized stocks comes with unique challenges. Growth, for example, can be difficult if it's at or near market saturation. Management inefficiencies can also cause problems at super-large companies, which can eat away at earnings.

That doesn't mean monster stocks shouldn't be avoided altogether. Rather, investors should simply focus on key stocks while avoiding others. Understanding this, here's why investors may want to consider buying real estate giants Prologis (PLD -0.37%) and American Tower (AMT -2.42%) while staying away from Annaly Capital (NLY -1.11%).

Data source: Author calculations from company reports, YCharts.

The premier industrial REIT

Prologis has quickly established itself as the premier industrial real estate investment trust (REIT). Not only is it the second-largest REIT by market capitalization, but it's the largest industrial operator in the world. The company has nearly 5,000 warehouse and distribution centers in its portfolio, which generated $3.6 billion in annual net income for the company in 2021.

The rise of e-commerce and the shift toward more localized manufacturing solutions has dramatically increased demand for this largely undersupplied industry. As of Q2, less than 3% of Prologis' portfolio was vacant, making it one of the lowest vacancy rates in the industry. Its net effective rent growth, which includes new and renewing leases for its properties, grew by 27% over the last year.

Despite its already massive size, the company is nowhere near finished growing. Prologis is in the process of purchasing one of its competitors, Duke Realty, in a $26 billion deal that should close by year end. This monster-sized acquisition will add 153 million square feet of operational industrial space to Prologis' portfolio. The REIT also has 10,700 acres of land available for future development and 7.7 million square feet in active development today.

Not to mention it's well-funded and boasts a super-healthy balance sheet. Its 2% dividend yield isn't exactly stellar compared to most other high-dividend yielding REITs. But given its growth potential and absolutely massive portfolio, it's undoubtedly a stock to buy and hold.

The giant of interconnection

Owning and leasing 220,000 cell towers, antennas, and data centers in 19 countries, American Tower is the largest provider of communications assets in the world. It's also the largest REIT by market capitalization at $121 billion.

Leasing communication sites to major communication operators like T-Mobile and AT&T isn't an exciting business model, but it is wildly profitable. Since its IPO in 1998, the company has provided around a 12% annualized return, far outpacing the S&P 500 during that same period. And thanks to the rollout of 5G technology, its growth is accelerating.

Although 220,000 is admittedly a lot of communication sites, the company is nowhere near market saturation, particularly with its global markets. Global adoption for 5G in American Tower's current communication sites is expected to be complete by 2025, plus the company is still expanding its 4G presence in more emerging economies. It also benefits from the fast-growing data center industry, the latest addition to its portfolio after acquiring CoreSite in 2021.

The company has ample cash on hand, low debt ratios, and a very conservative payout ratio. Like Prologis, its dividend return of 2.1% isn't stellar, but given its global dominance in this fast-growing industry, it's a long play that should reward investors well. 

A massive portfolio and notable risk

Annaly Capital's huge 13% dividend yield should be a telltale sign that not all is well with this massive mortgage REIT (mREIT) -- and that's probably about right. There are serious concerns that investors need to consider about its growth opportunities.

Unlike other mortgage REITs, Annaly Capital doesn't originate loans. It buys large pools of agency mortgage-backed securities, earning a profit from the interest while also servicing mortgage loans. Today it has over $82.3 billion in assets as the largest mortgage REIT in the industry.

mREITs are highly susceptible to changes in the marketplace, and today's volatile market is a challenging environment to navigate. Interest rate fluctuations impact the company's cost of borrowing, making it more expensive to purchase new loans. High inflation also eats away at its earnings given that over 50% of the loans it collects interest on are fixed-rate mortgages.

To combat these headwinds and continue to grow its revenue, the company has to buy more loans. This puts Annaly in an increasingly vulnerable position if a recession comes. Mortgage defaults are a common outcome of a recession, which puts a strain on the company. Fewer investors want to buy mortgage pools, particularly agency loans, as they typically carry higher levels of defaults than other loan types, limiting the liquidity options.

Annaly's debt ratios are better than other mortgage REITs, but it still has a considerable amount of debt on its balance sheet given the weakening economic conditions. It's also worth noting that Annaly has regularly cut its dividend since the Great Recession. This is why those seeking growth opportunities and reliability will want to look elsewhere.