Applying Guru Strategies to the Real Estate Market

 | Jul 18, 2014 | 1:00 PM EDT
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The real estate market is showing mixed signs. Sales of major commercial properties (over $2.5 million) rose 15% year over year in the first quarter of 2014, according to the National Association of Realtors. Yet the NAR also reports that sales for new homes declined 3.0%, though prices for new homes increased 5.4%. 

The real estate market is not on its deathbed, as it was a few years back, nor is it in robust health. But it is strong enough that companies in the real estate business can do well.

Two such companies are Two Harbors Investment (TWO) and Jones Lang LaSalle (JLL). My guru strategies, which are computerized strategies based on the writings of some of Wall Street's greatest investors, have identified these two companies as being well worth your consideration. If you want to diversify your portfolio into real estate, consider these stocks.

Two Harbors is a real estate investment trust, commonly called a REIT, which invests in residential mortgage-backed securities, residential mortgage loans, mortgage servicing rights and other financial assets.

Two Harbors gets high grades from my Peter Lynch-based strategy. The strategy's primary variable is the P/E/G ratio, which is price-to-earnings relative to growth, a measure of how much the investor is paying for growth, given today's stock price. A P/E/G of 1.0 or less is acceptable, and below 0.5 is considered very strong. Two Harbors is way down at a very desirable 0.23.

Jones Lang LaSalle is a financial and professional services firm specializing in commercial real estate services and investment management. It has 200 offices and operates in 75 countries. It just announced the purchase of CLEO Construction Management, a project-management services firm that targets healthcare properties.

Jones Lang LaSalle is favored by the strategy I created from the writings of James P. O'Shaughnessy. The strategy gives high marks to the company's market cap ($5.7 billion), earnings per share, which have increased in each of the past five years and a price-to-sales ratio (a way to measure how well priced a stock is) of 1.24 (1.5 is the maximum allowed).

Companies that pass these tests are then ranked by their relative strength (which measures how well has a stock has performed in the past year vis-à-vis the overall market), and only the top 50 get a nod from the strategy. Jones Lang LaSalle gets into this 50-top group with its relative strength of 77.

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