Public Storage (NYSE:PSA) has been in a pretty steady downtrend over the past two years. While PSA stock has been in free-fall mode, it’s allowed the dividend yield to steadily climb higher. Now yielding just over 4%, PSA is surely tempting some investors. But should they bite?
While the yield is admittedly attractive, it’s not enough of a reason to buy the stock. Jumping into a stock with a 4% yield doesn’t do much good if the stock falls 20%. While Public Storage stock may not necessarily decline that far, that’s not the point. The point is, investors shouldn’t chase stocks of companies that aren’t great simply for the yield.
If you want a great yield and a great company, it’s not that hard to find.
In the case of PSA stock, it’s not a terrible company. But there is so much uncertainty in the real estate investment trust space that, at least in my view, we have to go with the best. The stock chart for PSA doesn’t help matters.
Sizing Up PSA Stock
In April 2016, the self-storage REIT operator bumped its dividend by roughly 6%. Six months later in October, it gave it another ~11% boost. Good year, right? Definitely. But that seemingly marked the top as shares tumbled from almost $260 to below $200.
REIT investors might say the selloff in PSA stock is overdone. Given the 24% beatdown over the last 24 months, that’s hard to argue. Operating in the storage business has typically been good, as proven by the stock’s steady rise from $50 in 2009 to $200 in 2015.
Even though Realty Income Corp (NYSE:O) is a best-in-breed REIT, I can see where some investors may have concerns over the landlord/rental business. Even though Realty does an excellent job of diversifying its tenants, worries over e-commerce and the shrinkage of brick-and-mortar locations can be a turnoff for some.
That’s fine. But what about high-quality REIT operators in the healthcare space? Or how about those in technology that serve as data storage centers for gigantic tech companies?
Companies like Ventas, Inc. (NYSE:VTR) continue to benefit from the growing influx of customers looking for senior care. Digital Realty Inc (NYSE:DLR) and CyrusOne Inc (NASDAQ:CONE) continue to benefit from the non-stop growth in cloud computing.
So while the entire REIT world has been under pressure, if I’m putting my dollars to work it will be in best-of-breed companies and/or in ones that have strong secular demand. That’s not to knock PSA stock necessarily. It has rising cash flows and operating margins, while analysts expect 11% earnings growth this year on ~4% revenue growth.
That’s very solid, but when the sector is under pressure, I want to go with the best. Also, O and VTR have higher yields, while DLR and CONE aren’t far behind.
Trading Public Storage Stock
The charts help tell the story here too. While the chart favors the bears, there’s one thing that can make PSA stock a buy.
As you can see above, there has been a steady downtrend of resistance since PSA stock made its highs in 2016. With resistance just above $200, it wouldn’t be too surprising if Public Storage came under pressure once more. Further, this $200-level had once been support. Failure to get back above it will reinforce this area as resistance.
Support (shown in blue), sits down near $180. This level held up earlier this year and should PSA stock fail to push through resistance now, it’s likely headed back to this level. Here’s where things get interesting though. Should Public Storage close above resistance, the whole bear case could come undone. That would make PSA stock a buy, so long as it doesn’t fall back below this downtrend line.
That’s the lone bull case — at least when it comes to the technicals.
For now, the bears remain in control. Where it gets dangerous is around $180. Should shares continually test this level of support, it could eventually give way to lower prices. Higher interest rates from the Fed likely won’t help, as it will keep the REIT space under pressure.
In a nutshell: Watch for a breakout over resistance, currently between $200 and $210, and watch for a break below $180 support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he held a long position in O.
