Summary
- We search for REITs with dislocations between price and fundamentals.
- These particular REITs are resilient through this environment making the cheap prices opportunistic.
- We discuss key misconceptions that have facilitated the underpricing.
- This idea was discussed in more depth with members of my private investing community, Retirement Income Solutions. Get started today »
It is easy to find stocks with strong fundamental outlooks. That may sound glib if interpreted to mean that I have some sort of gift for finding such stocks. Instead, what I am saying is that it is easy for ANYONE to find stocks with strong fundamental outlooks. Certain sectors of the economy are simply better positioned right now and that better positioning is well known.
Here’s the problem. If it is easy for you to see that a stock is well positioned fundamentally, everyone else sees it too. These clear winners become crowded trades and valuation starts to get dangerous. If you look at REITs, for example, it is clear that data centers are well positioned in the stay-at-home economy. So buy data centers right?
Well its not that simple, because everyone knows data centers are well positioned.
Source: SNL Financial
While the average REIT is trading at a 24% discount to NAV, data centers are at a 14% premium. We have owned CyrusOne (CONE) and QTS Realty (QTS) at various points in time as these are genuinely good companies and we still hold small positions in some accounts, but valuation is becoming an issue. At what relative valuation are the strong fundamentals fully priced in?
At what relative valuation are the strong fundamentals more than priced in and any performance short of perfection becomes a downside risk?
The true challenge is to find pockets of fundamental strength that are not being recognized by others. I am far from perfect at doing this, and make plenty of mistakes, but at this particular moment in time I believe we have found substantial opportunity.
Our High Yield REIT Portfolio (2CHYP) and our Growing Dividends Portfolio (2GDP) consist of stocks that we believe to have strong fundamental outlooks yet trade at substantially discounted multiples and NAVs. These stocks seem to have been overlooked by the market or falsely lumped in with groups of stocks that are less resilient. There are 8 stocks in particular that I want to highlight.
