As the market worries about overpriced technology and industrial stocks, one group that has already corrected into undervalued territory is real estate investment trusts, or REITs. So far this year, the S&P500 Real Estate sector has declined over 7%, with a three-year return of just over zero compared to the broad market's return of 30% over the same period. Once largely ignored, REITs earned their own sector classification within the S&P500 Index in 2016, significantly raising their profile among investors.
As turnaround investors, we approach REITs differently: Rather than focusing on a particular segment of the real estate market, we look for individual REITs that have been neglected by investors but have solid value--that should prevail regardless of the overall market.
The senior living sector has a lot going for it right now. First and foremost are demographic trends, with the number of senior citizens in the U.S. expected to rise dramatically in the coming decades. In addition, the industry remains quite fragmented with many senior living units run by small local operators. This means that public companies in the sector can continue to grow by acquisition, and eventually even these public companies may become acquisition targets for larger industry consolidators. Yet in spite of these favorable factors, most of the more focused senior living stocks have performed relatively poorly over the last year and half or so--creating a promising contrarian investing opportunity.
When investors think about turnarounds, they usually think about manufacturing, retail or service companies. One additional type of company that often is ignored is the real estate investment trust, or REIT. With REIT turnarounds, the mantra is “management, management, management.” That's because these often involve selling illiquid real estate, which can take considerable time. For patient investors, however, REIT turnarounds can offer substantial gains while often paying attractive dividends in the meantime.
It may take a while for management of a spun off company to find its footing and for the stock to find its way into the hands of investors who appreciate the potential value in the new company--creating a window of true turnaround investing opportunity.
Recently, investors have been pouring into certain stocks that pay dividends, particularly utilities and REITs as bond substitutes, since actual bond yields are so low. That has pushed the prices of these bond substitutes up quite a bit over the last year or two, and we think they may be vulnerable when interest rates finally do begin to rise. The turnaround stocks in this article have performed less well recently, but have the potential to begin showing positive fundamental improvement in the not-too-distant future. In the meantime, they are paying relatively generous dividends.
FCH is a prime example of the benefits of thorough analysis, a prudent investing strategy and the benefits of knowing when to sell and lock in profit. Those factors teamed up to give Turnaround Letter readers a solid 150+% gain with this stock—and a timely reminder to respect the old Wall Street adage: "Bulls make money; bears make money but pigs get slaughtered."
This REIT is successfully executing a promising strategic plan and is also poised to benefit from positive industry trends. The Turnaround Letter feels corporate profits and stock prices will both rise and suggests a maximum recommended purchase price of $7.
In nearly every case, the shares of a company in bankruptcy become worthless. In very rare cases, however, they can become great investments. W.R. Grace (NYSE:GRA) shares produced a 75-fold return, as an example. With California utility PG&E (NYSE:PCG) now in bankruptcy, the range of possible outcomes for its equity is wide.
In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
This Forbeswrite-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.
George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."