Value stocks are shares of companies trading for low valuations relative to their earnings and growth potential. They can be an excellent way for investors to minimize risk in the market while benefiting from perks like dividend payments and share buybacks, which can add up over time.
Realty Income (O -0.17%) and Shutterstock (SSTK 0.43%) fit this category because of their low price tags and bright futures. Let's discuss why they could be good picks in an increasingly uncertain economic environment.
Realty Income
Founded in 1969, Reality Income Corporation is a real estate investment trust (REIT) designed to give its shareholders reliable income by purchasing and leasing commercial real estate to qualified tenants. While shares tumbled 20% year to date, the company's business model remains strong, making the near-term dip a long-term buying opportunity.
When interest rates rise -- as they have done sharply in 2023 -- it creates many difficulties for REITs. From an investor's perspective, shares become less attractive relative to bonds and other interest-bearing assets. On the operational side, higher rates can decrease the value of their real estate properties and increase borrowing costs. But the good news is that these microeconomic headwinds won't last forever, and Realty Income is positioned to survive them.
According to management, 91% of the company's total rent income is resistant to economic downturns because most tenants operate non-discretionary businesses (they sell goods and services that consumers need, not simply want). And despite the uncertain economy, its real estate portfolio still maintains an occupancy rate of 99% as of the end of the second quarter, with just 137 of its 13,118 properties available on the market.
Realty Income is an excellent pick for income investors because of its annual dividend yield of 6.1%, paid in monthly installments. The company has increased its payout for a whopping 25 consecutive years.
Shutterstock
Shutterstock specializes in digital content licensing, mainly for photographs and footage. And while shares are down 27% this year because of possible competition from generative artificial intelligence (AI), it could soon turn this challenge into a long-term opportunity by incorporating the technology into its business model.
Shutterstock typically monetizes its vast content library by licensing usage rights through subscriptions. However, the rise of generative AI platforms introduced a fear that customers can now cheaply create their own content instead of relying on platforms like Shutterstock. Management is trying to turn this challenge into an opportunity to drive growth and diversify the company's business model.
Image source: Getty Images.
AI models rely on large datasets of real-world content, leading to lawsuits against OpenAI and other AI companies that may have trained their apps with copyrighted material. Shutterstock can solve this problem by licensing its library of over 300 million images for AI training.
In July, the company expanded its partnership with OpenAI to license its content to the generative AI platform in return for payment and access to some of OpenAI's latest text-to-image technology, which will allow Shutterstock customers to create and edit their images within its platform. This deal could boost the company's growth and improve its moat. Shares have a trailing price-to-earnings (P/E) multiple of just 12, which is less than half the S&P 500 average of 25.
Which stock is best for you?
Realty Income and Shutterstock are both great value investments, but they serve very different investment strategies. Realty Income is the safer bet because it is a large blue-chip company with a long track record of success. On the other hand, Shutterstock offers higher risks and higher potential rewards because it is unclear if the smaller company will be able to use AI training to counteract potential weaknesses in its traditional photography licensing business as industry competition intensifies.
