In my last look at the real estate market, I noted that real estate has been stagnant for quite awhile, as good and bad reports about real estate cancel each other out from week to week. In addition, even when the real estate headlines seem to be strong, a quick look behind the surface numbers points out some glaring weaknesses in the real estate market.
Main Street might be fooled, but not Wall Street, and most of the real estate sector continues to get punished for it.
In fact, the SPDR S&P Homebuilders ETF (XHB) has been the perfect example to represent this ongoing mediocrity. On July 12, 2013, XHB closed at $31.15. Roughly one year later, and it’s 4 cents lower. Add in a 1.6% dividend yield, and your return over the past year was … um, 1.6%.
Not exactly the most scintillating return.
Of course, the advantage of the XHB is the relative ease of the investment. It’s well diversified and you can pretty much set it and forget it. But at this rate, it’s also not going to make you wealthy any time soon. So if you’re absolutely insistent upon investing in the real estate sector, forget the XHB. Instead, here are four vastly superior ways to invest your money right now:
Playing Real Estate – Covered Calls on D.R. Horton (DHI)
If DHI closes at or below $26 on Aug. 22, you will keep the total premium and as much as 7.8% in price appreciation.
DHI has been one of the absolute strongest of the otherwise tepid homebuilder stocks, and is up 10.4% year-to-date.
If you’re playing real estate, D.R. Horton is one of the only individual homebuilder stocks I would recommend right now.
Playing Real Estate – Buy iShares Residential Real Estate Capped ETF (REZ)
Click to Enlarge What the heck is iShares Residential Real Estate Capped ETF (REZ), you ask? It’s an exchange-traded fund of real estate investment trusts covering apartment houses, healthcare facilities and storage units.
REZ, which also sports a 3.48% dividend yield, recently traded around $53.90 — a 20%-plus year-to-date return in what continues to be a very hot rental market.
REZ is the perfect way to invest in real estate right now without having to get that annoying call at midnight because your tenant’s pipes are leaking!
Playing Real Estate – Buy Beacon Roofing Supply (BECN)
Click to Enlarge By contrast with REZ, Beacon Roofing Supply (BECN) has been on a really bad slide since its $40 peak in March. BECN is down strongly over the past few days, and recently closed below $29.
Beacon, which sells roofing materials to both residential and non-residential contractors and homebuilders, has been hurt by slowing growth in the homebuilding sector, and has negatively revised its own numbers several times over the past few months. BECN’s next earnings report is due out Aug. 4, and volume has been heavy on the recent down days.
So why would I recommend this real estate-related stock now?
Well, for one thing, after this 30% decline, if you believe that better days are ahead for the jobs market, that will positively impact homebuilders, and in turn will lift shares of BECN.
But the other reason, albeit more speculative in nature, is that we are now approaching hurricane season. BECN stock has a tendency to rise quickly as a bad hurricane beckons in the waters of the Gulf or Atlantic, and can really take off after a hurricane and its subsequent tornadoes rip apart several thousand roofs. In the three-week period before and after Hurricane Sandy in 2012, BECN rose about 18%.
On the weekly chart, the 200-day moving average is only a few percent lower from current prices around $28.90, and could easily lend support to the stock. A really bad storm could pop BECN stock right back up to $35 in a hurry.
Play Real Estate – Buy One Liberty Properties (OLP)
OLP nearly doubled its share price between late 2011 and May 2013, when it topped out around $27, then spent last year retracing almost half of that before climbing to current prices around $21.50.
The stock has been trading sideways for months now, but is the perfect income-producing stock. OLP has been steadily raising its dividend since 2007, and the current dividend yield is a juicy 6.7%.
For an even better play, sell a naked Aug 16 $20 put, which currently trades for 70 cents. If the stock stays above $20 by mid-August, you’ll make a nice, fat premium of 3.5% in only a month, but if it falls below $20 and you have to buy the stock at $20, your premium will protect you as well and your dividend yield will be a very rich 7.4%.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.