Build a Strong Portfolio With These 2 Stocks

NEW YORK (TheStreet) -- German philosopher G.W.F. Hegel opined, "Property is the first embodiment of freedom." Most would wholeheartedly agree.

Recently, I was reading an article in the Oct. 8 edition of Fortune magazine and discovered who is America's number 1 owner of private land. Care to guess who that would be?

My guess would have been Ted Turner but, alas, he is now #2. The top spot, the largest private landowner in this country, is John Malone. According to The Land Report magazine, Malone owns an estimated 2.2 million acres of U.S. of woodlands, ranch land and cropland.

He's still behind the individual who owns the most land in the world, Britain's Queen Elizabeth II, and that's because she technically owns places like Canada and Australia, her "Commonwealth." I'm sure Malone doesn't mind, because as a billionaire he can just keep buying all the property he wants.

Malone made his billions by prescient business decisions, like being early to the party on the value of cable TV and media businesses. He was also good at executing some complex financial deals in the world of telecommunications. He worked for 25 years for one of the legends of the telecommunications industry, Bob Magness, who owned a start-up cable-television company called Tele-Communications Inc.

It later became known as TCI, and Malone worked hard and long to build it into what would become the second-largest cable-TV company in the nation, after Time Warner TWX . In 199 Malone sold TCI to AT&T T for $48 billion.

Shortly thereafter, Malone purchased the 80,000-acre Silver Spur ranch in Saratoga, Wy., his first major land deal. That whet his appetite to search for more property to buy. His friend Ted Turner turned Malone on to "the idea of investing in land ownership and stewardship." As Malone told Fortune, "Ted...was the one who gave me the concept that you could do well and do good in landownership."

You can indirectly participate in the benefits of residential property ownership where the objective is buying low, collecting rent on these properties and then, when these properties appreciate fully, sell. This can be done by buying shares of Blackstone Group BX .

BX provides alternative asset management and financial advisory services worldwide. It operates in five segments: Private Equity, Real Estate, Hedge Fund Solutions, Credit Businesses and Financial Advisory. What's exciting to me about BX is its real estate acumen. It knows when to get out and when to get in.

Back in 2005 through 2007, when real estate prices were going nuts on the upside, Blackstone sold $60 billion worth of real estate assets at the top of the market. Now it's doing its utmost to buy back in, focusing primarily on income-producing residential rental properties.

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In a recent conference call, the founder of BX said, "Over our 27-year history, we've generated net annualized returns on realized investments of 23% in private equity and 28% in our global real estate business, which dwarfs performance of virtually any other investment class."

Recently, the company informed the investment world that it's purchased approximately $1.5 billion worth of houses in 2012 alone. It was classified as around 10,000 homes, which average about $1,000 a month in income. Do the math. That would mean around $10,000,000 per month in income on these properties alone.

BX's founder also clarified the ongoing strategy of buying at distressed pricing, fixing the houses up so they can be rented and someday selling when the real estate market becomes overvalued once again. BX has some peripheral ways of making money with real estate.

Their founder said, "We have our GSO Group, for example, doing financing structures for homebuilders. We have our Tactical Operations Group buying nonperforming loans... We're looking at investing in mortgage-related securities, which we think have very significant upside."

Blackstone reported that it has committed $17.6 billion to real estate since 2009. This would mean that BX is the biggest corporate investor in the world in the residential housing market. The chart below tells its five-year history when it comes to price-per-share and free cash flow. BX ChartBX data by YCharts

Over the next couple of years I anticipate the free cash flow increasing significantly along with their earnings-per-share (EPS). It's notable that the stock is trading at seven times forward earnings (one-year) and that the company is able to pay a 2.7% dividend. Increasing EPS and operating cash flow will be essential to sustaining and growing the dividend.

Shares of BX moved from an intraday low of $13.31 on Nov. 16 and closed at $14.95 one week later. That's a 12.3% move in one week's time. This is partly because of a buy recommendation by Dr. Steve Sjuggerud, the editor of True Wealth, who highlighted BX when it was trading around $13.50.

Another way to invest in a diversified portfolio of investment properties is to own shares of One Liberty Properties OLP . OLP is a real estate investment trust, or REIT, engaged in the acquisition, ownership, and management of commercial real estate properties in the United States.

OLP's property portfolio includes retail furniture stores as well as industrial, office, supermarkets, health and fitness centers and other property assets. It pays a 7% dividend yield based on its closing price of $18.71 on Friday.

Its dividend represents a payout ratio of 65% of earnings, but I'm not worried about it because from a profitability standpoint OLP looks strong. As of its most recent quarter ending Sept. 30, it sported a profit margin of 63.24% and an impressive operating margin of 56.5%.

Trading at trailing PE ratio of only 9 and a forward PE of 11, OLP is one of the most reasonably priced of the publicly traded real estate companies. Do your own due diligence and learn more about OLP at its well-organized Web site.

The next 12 to 24 months looks like an auspicious time to own real estate and income-producing properties, either directly or through companies like the ones I've highlighted. You still have a good shot at benefiting before the herd catches on and drives the share prices to higher levels.

At the time of publication the author had a position in OLP.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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