Speculations over rate hike have always kept the real estate investment trust (REIT) investors on their toes and this time is no different. In fact, the hawkish statements by the Fed officials including the Fed Chair herself have paved the ground for a rate hike as early as this month. This has led the REIT industry, which has long benefited from the low rate environment, to experience price declines. (Read: REIT Stocks in Free Fall, Thanks to Rate Hike Speculation)
However, the recent release of weak economic data, ranging from lower-than-expected retail sales and industrial activity as well as slowdown in job growth and manufacturing activity, took the hawkish rhetoric away. The most recent release of improving inflation data has further added to the ambiguity over the timing of the hike.
Even if rates rise, ignoring the REIT space entirely is not a prudent step. In fact, if investors pay close attention to the long term prospects of the REIT industry, they can trace ample scope for growth. This is because REITs are a special hybrid asset class which not only gain from an uptick in economic activity and job growth, but also benefit from an appreciation in the value of the real estate assets they hold. Therefore, as long as rate hikes are backed by improving economy, REIT investors can keep their worries about the short-term impact on the borrowing costs at bay.
In fact, gains in employment and growth in wages actually translates to increased buying power as well as improved spending trends, and when economic activity gathers steam, demand for space automatically grows. However, economic weakness in the past reined in supply at a manageable level. Amid this, real estate landlords seem well poised for growth in occupancy and can command higher rents for their spaces.
Also, the REITs recent split from the Financials in the S&P 500 Index and getting own foothold reflects their growing prominence in the economy and prospects of drawing in billions. So, valuations are expected to get a push.
Amid this, betting on REIT stocks can give you good returns, particularly when accumulated in price dips like now. Because, although people fear buying stocks when they are witnessing decline, adding them with less initial investments can usher in great returns when they eventually appreciate.
How to Pick Such Stocks?
To find such cheap stocks with great growth potential, nothing can come in as handy as the Zacks Screener.
We screened stocks with a Zacks Rank of #1 (Strong Buy) or #2 (Buy), which means that they are witnessing positive estimate revisions. We then searched for those stocks that have witnessed price dips in the past four weeks and finally zeroed in on them with P/E ratio at a discount to the industry average, making their valuation all the more attractive.
Here are the four stocks that meet our criteria:
Jersey City, NJ-based Mack-Cali Realty Corp. CLI is a REIT that is engaged in providing management, leasing, development and other tenant-related services for office and multi-family real estate assets. This Zacks Rank #2 company is making solid progress in its 20/15 strategic plan, which is aimed at transforming the company by focusing on waterfront and transit-based office holdings in the Northeast, and on luxury multi-family portfolio growth. It also includes planned exits from non-core markets and capital improvements in core assets. However, the stock has declined 2.46% in the past four weeks.
Estimates for the company for 2015 and 2016 are trending up, suggesting bullishness ahead. What’s more, its valuation remains attractive on a P/E basis with the stock trading at 12.76x, a discount of around 14.4% to the industry average of 14.9x.
Care Capital Properties, Inc. CCP, based in Chicago, is a real estate investment trust which is engaged in the ownership, acquisition and leasing of skilled nursing facilities and healthcare assets operated by private regional and local care providers. This REIT operates independently of Ventas Inc. VTR since around the mid-Aug 2015. However, over the past 4 weeks, the stock has dropped 3.68%.
With positive estimate revisions for the current year and the stock trading at 9.33x, reflecting a discount of over 37%, Care Capital Properties remains a preferred pick among the cheap stocks. Also, it currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Irvine, CA, HCP, Inc. HCP acquires, develops, manages, sells and leases a diverse portfolio of healthcare real estate related properties. This Zacks Rank #2 company stands to gain from its diverse portfolio, rising healthcare spending and an aging population.
Though the stock has declined 5.02% in the past four weeks, analysts are bullish on the company and have raised their estimates. Also, the valuation too looks cheap with the stock trading at a P/E of 13.15x, reflecting a discount of over 11.7% to the industry average.
EPR Properties EPR, based in Kansas City, MO, is a specialty real estate investment trust that invests in three primary segments, Entertainment, Recreation and Education. Its properties include megaplex theatres, entertainment retail centers, and destination recreational and specialty properties. Its current cash flow growth is 17.09% compared with the industry average of 9.42%. Further, projected sales growth is 20.71% against the industry average of 1.67%.
Though this Zacks Rank #2 stock has declined around 3.14% in the past four weeks, it remains a solid pick with its P/E trading at 16.04x, a discount of over 9% to the industry average.
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