I was delighted to see that Real Money was not awash in the "How to invest and profit from the State of the Union" stories that are clogging up inboxes and web pages this morning. No matter what side of the aisle you are on there are no actionable items to take out of the speech. Any proposal President Obama floats will be shot down by Republicans and anything meaningful the Republicans pass will be vetoed by the President. Nothing in the speech changes anything and investors and traders alike should not make any sort of change to their game plan.
My approach is laid out in my 2015 slogan, "Cash, Common Sense & Community Banks." As I have pointed out many times, there are not a lot safe and cheap stocks right now and holding lots of cash makes an enormous amount of sense to me. I also like the community bank stocks and have been loading up (1% or so at a time) on many of these safe and cheap banks. I mentioned to an associate yesterday that over the almost 30 years I have been investing, banks have made me more money than anything else.
Being the inquisitive type, my friend asked if I knew what sector had been the second most profitable for me. In fact I do. It's real estate and real estate-related securities. Buying real estate-related securities has been extraordinarily successful for me. As with anything else, I like to buy those names that are at a pretty good discount to book value, with a solid balance sheet. Also, during stock market busts, investors begin to sell and avoid anything real estate related, and REITs and other real estate-related companies tend to get very cheap, very fast. I am already at work looking into REITs with big exposure to Texas and North Dakota. If oil prices stay low, real estate in these areas is going to become very inexpensive and I will be an enthusiastic buyer.
At the moment, there are not a lot of real estate values around, but there are a few. I like shares of Preferred Apartment Communities (APTS) at the current price. The REIT owns 3,326 multifamily units, with an additional 3,663 units (which it holds an option to purchase) under development or initial lease-up through its mezzanine loan program. It has also taken advantage of its ability to use 20% of assets to buy shopping centers anchored by grocery stores. I love these strip mall-type neighborhood centers as most of the stores cannot be replaced by online vendors. APTS shares currently trade hands at 70% of book value and yield 7.4%.
Campus Crest Communities (CCG) struggled a bit last year and finally came to what I think is the correct decision to limit development activities and focus on managing what it already owned. The REIT also cut its dividend to conserve cash. While the firm may have over-reached in 2014, there is a lot of value in the stock. Campus Crest has ownership interests in 86 student housing properties with over 46,000 beds across North America. Activist investor Clinton Group has informed Campus Crest's management that it intends to nominate four directors at the REIT's annual meeting. Even after the dividend cut, the shares yield 5.24% and trade for 86% of book value.
As for the single family home REITs, they have remained stubbornly almost cheap enough. Given the longer-than-expected turnaround time I see for the housing market, I want to get a very good price and these REITS are at a good price. American Homes 4 Rent (AMH) trades at 99% of book value, Silver Bay Realty Trust (SBY) at 1x book value and Starwood Waypoint Residential Trust (SWAY) at 87% of book value. I think we will see investors start to throw in the towel this year as dividends and dividend growth levels fall short of expectations. Housing is going to take longer to recover, and while I don't think we will have another meltdown, I do see some signs of over-building and price weakness in certain markets. It's not a bust, or even close to it, and I believe very strongly in a housing recovery, but my timeline for that is a lot longer than what the bigger bulls will have you believe. Because of that, I want to buy these names at 80% of book value or less.
Over my career, real estate has been the second most profitable sector for me, but like everything else you have to be certain you are buying at a discount to asset value and have the patience to hold the securities for the several years it will take for them to approach full value.