I talked in my previous column about the value of screening stocks for "Top Two Buying" ¿ situations where a company's CEO and CFO have enough confidence in their firm's future to buy shares themselves. Here are three stocks this screen turned up in the real estate sector.
But first, some background:
As I noted yesterday, a company's top two executives theoretically know more about the firm's financial condition, future plans and corporate strategy than anyone else. So, those who buy shares with their own money probably have lots of confidence in the company's long-term future and think they're getting a good deal at a stock's current price.
My "Top Two Buying" screen found quite a few senior real estate executives buying their own companies' shares. While I think there are some pockets of overvaluation in top-tier cities like New York and San Francisco, there appears to be quite a lot of opportunity in commercial and residential real estate for careful buyers.
Let's check these names out:
Jones Lang LaSalle (JLL)
JLL is one of the world's largest real estate companies, providing real estate management and outsourcing via 230 offices in countries around the world. The firm's LaSalle Investment Management division also invests more than $56 billion for its clients.
JLL Chief Executive Colin Dyer is upbeat about his firm's 2016 prospects, telling analysts during the company's latest conference call that "looking at our markets, JLL research projects investment sales and leasing volumes to maintain a healthy pace throughout 2016. The noise in the newsflow has produced more-cautious investment sentiment at this point, but the amount of capital that continues to be allocated to real estate indicates there'll be no reduction in underlying investment flows."
Dyer is backing up that assessment up with his own cash. He's made open-market purchases of the JLL stock in recent weeks, and also appears to have exercised some stock options and retained the shares.
This company operates and franchises several real estate brokerage firms, including Century 21, Coldwell Banker, Coldwell Banker Commercial and ERA.
Business is solid, as RLGY just reported a 29% year-over-year increase in earnings during 2015. CFO Tony Hull said on the firm's latest conference call that "we are well-positioned to build on the robust free cash flow we generated last year -- regardless of how transaction volume transpires -- given our strong market position, our focus on costs and reduced interest expense."
He's enthusiastic enough to open his own wallet and buy RLGY shares for himself in the past month. CEO Richard Smith has done so, too.
Hersha Hospitality (HT)
This firm owns 55 hotels with 8,654 rooms, with most of properties in key East Coast markets like New York, Boston and Philadelphia.
Now, the hotel business has been one of the few out-of-favor commercial real estate sectors, weighed down by concerns about Airbnb and a strong U.S. dollar (which could discourage foreign tourists from visiting America).
But Hersha CEO Jay Shah likes what he see ahead for the company. He recently told analysts: "With continuing record occupancies across the country and in our portfolio, Hersha is well-positioned to further increase ADR in 2016 -- which, combined with our industry leading margins, will drive strong profitability growth and free cash flow."
Both he and CFO Ashish Parikh have been buying Hersha shares lately, as have COO Neil Shah and Chief Accounting Officer Michael Gillespie.
Hersha is also using corporate funds to buy back stock, purchasing 5.3 million shares last year for $127.9 million. The firm has about $72 million left on its current buyback authorization.
I believe HT is attractive to both growth investors and income investors, as the shares currently yield about 5.2%.
The Bottom Line
Keeping an eye on which CEOs and CFOS are buying their companies' stocks makes a lot of sense, as those executives know more than anyone about a given firm.
So, all three of the real estate stocks above interest me, although I do have one caveat: The stock market has risen about 10.5% over the past month, and these stocks have risen along with it. As such, I'd recommend waiting for a pullback before jumping in alongside these firms' insiders.