Profits of companies that have already released their earnings can be enticing this earnings season. However, rather than accumulating after the earnings report, investing in those that are yet to report and poised to beat can be far more rewarding. An earnings beat serves as a catalyst, raises investors’ confidence in a stock, results in rapid price appreciation and ensures more gains from one’s investments.
Further, buying an undervalued earnings play with less initial investment translates into great returns when the stock eventually trades at a higher price. And this brings us to the REIT industry, which lost over 8.9% in the last six months compared with the S&P 500’s gain of 4.5%. No doubt REIT stocks were hit hard as Fed officials hinted at multiple rate hike over the next two years. In addition to this, the bond rout pushed their prices further down.
However, apart from the rate factor, the underlying asset class dynamics play a vital role in determining the operating performance of REITs. And there were several bright spots in the quarter with the economy and the job market showing signs of recovery. Therefore, with the industry significantly underperforming the broader market, there is a solid value-oriented path ahead.
Particularly, the office and industrial asset categories hogged the limelight for experiencing high demand. In fact, going by numbers, per a study by the commercial real estate services’ firm CBRE Group Inc (CBG), for the U.S. industrial market, availability fell for 26 straight quarters to 8.2% in the fourth quarter. Also, the overall office vacancy rate declined 10 basis points (bps) to 12.9%, denoting the lowest level since first-quarter 2008.
Supply issues in a number of markets have raised concerns for some of the residential REIT stocks, and dwindling mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks. However, growth in cloud computing, Internet of Things and big data drove demand for data center REITs.
In addition to the individual asset class fundamentals, there are other reasons to bank on REIT stocks right now. This is because, even though the broader market witnessed a stellar run following Trump’s election last November, his recent protectionist and anti-trade policies are flaring up volatility in the market and bringing the mojo back in the REIT space as investors, particularly the income seeking ones, are looking for safer refuge.
The Zacks Methodology
In spite of the drivers, choosing the right stock could be quite difficult unless one knows the proper method. To make the task simple we rely on the Zacks methodology, combining a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. And research shows that for stocks with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Here are four REITs that have the right combination of elements to deliver an earnings beat when they release their fourth-quarter results:
Sunstone Hotel Investors Inc (SHO) has a Zacks Rank #2 and an Earnings ESP of +4.0%. The Zacks Consensus Estimate is pegged at 25 cents per share. The company delivered positive earnings surprises in each of the last four quarters, with an average beat of 6.8%.
Also, this stock with a Value Score B has a solid dividend yield of about 14.3%, which is encouraging. Per our style score system, a stock with favorable Zacks Rank and Zacks Value Style Score of ‘A’ or ‘B’ is highly desirable as research shows that such stocks handily beat others.
Aliso Viejo, CA-based Sunstone Hotel Investors is a lodging REIT that has a portfolio of hotels which are mainly in the upper upscale segment. The hotels are usually operated under brands such as Marriott, Hilton, Fairmont and Hyatt.
Sunstone Hotel is slated to release results on Feb 21.
EPR Properties (EPR) has a Zacks Rank #2 and an Earnings ESP of +0.81%. The Zacks Consensus Estimate for the quarter is $1.24 per share. This indicates a year-over-year increase of nearly 4.8%. The stock is not only trading at a discount to the industry average, it also boasts a decent dividend yield of 5.6%.
Kansas City, MO-based EPR Properties is a specialty REIT 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 focus on multiple property types helps it to beat the retail market blues.
EPR Properties is expected to report results on Feb 28.
Hospitality Properties Trust (HPT) has a Zacks Rank #3 and an Earnings ESP of + 9.09%. The Zacks Consensus Estimate for the quarter is 55 cents per share. The company delivered positive surprises in three out of the trailing four quarters, with an average beat of 3.26%. The stock is also trading at a discount to the industry average and has a solid dividend yield of 6.5%.
Newton, MA-based Hospitality Properties Trust is a lodging and travel center REIT with investments of around $9.0 billion in 305 hotels and 198 travel centers located in 45 states, Puerto Rico and Canada as of Sep 30, 2016.
Hospitality Properties is likely to report its results on Feb 22.
STAG Industrial Inc (STAG) carries a Zacks Rank #3 and has an Earnings ESP of +2.50%. The Zacks Consensus Estimate is pegged at 40 cents per share. The company posted an average positive surprise of 2.61% over the trailing four quarters. Currently, the stock has a solid dividend yield of 5.9%.
Boston, MA-based STAG Industrial is engaged in the acquisition and operation of single-tenant, industrial properties throughout the United States.
STAG Industrial is slated to report results on Feb 16.
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