U.S. REITs: Market Sentiment Prior to Q1 Results Release


chart01Another quarterly results period has begun, leaving investors anxious to determine where they will place their next investments. I have never been one to invest solely on market sentiment. However, this sort of context is most important when I’m identifying the best investment window. Week in and week out, I’ve been following the ups and downs of the market, while also paying attention to what kind of news has been driving the movements. Consequently, I quickly selected some of the market sentiments that have been formed pre-results over the past few weeks. Now, there’s just one question. Will they hold steady until the end of the period?

These are the following market sentiments toward equity REIT stocks.

Healthcare and Hotels: Due to a large number of stocks trading above average dividend yield, many have looked to stocks in healthcare and hotels to make their long-term bets. The sentiment appears to be correct. However, I don’t want to be a killjoy, but most of these stocks have a reason to be undervalued, so it’s important to pinpoint the causes first. The field here is certainly wider than in most sectors, but I’d recommend exercising some caution and patience before venturing out.

Realty Income: It is upsetting to see the rich universe of equity REITs condensed into a sole stock, but that’s what many investors do. They limit themselves to this stock. For that reason, opinions about how overpriced it is abound on the internet. Since its well established peers in freestanding retail have also appreciated, this sector has become overcrowded. So, the sentiment is right about it being overcrowded. I would definitely stay away from the popular choices.  

Self Storage: It had been awhile since self storage didn’t fall farther than the rest of the market. However, this happened last week. Most stocks fell south of 4%, which I see as a sign of saturation. Also, while I don’t entirely rely on equity research analysts, it’s worth noting that Goldman dumped Public Storage this week. In summary, I could see some movement geared toward selling self storage.

In fact, the strength of the self storage sector is something to pay attention to with the next releases. There doesn’t appear to be blatant signs of oversupply in the market, which makes me believe the fundamentals are still good. For this reason, I wouldn’t recommend shorting it.

In our dividend yield chart, self storage has had the lowest average dividend yield…even lower than the data centers. This is a sign that it could have reached a peak. I’m not sure if it will go down anytime soon, but lower yield and a higher multiple aren’t a good combination for investors willing to buy. Also, given the limited number of options, I haven’t identified an alternative that feeds into the same fundamentals.

Please let us know if you have identified any other sentiments that are not listed above.

Source: Realty Income Corporation(NYSE:O),Public Storage(NYSE:PSA)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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