Buy Good Stocks That Others Are Shunning

Chasing hot stocks and trendy industry groups means paying up to run with the bulls. Smart investors learn to buy solid businesses that are temporarily out-of-favor. They are the ones which can be purchased at bargain prices. Last weekend's Wall Street Journal noted how ignored real estate investment trusts (REITs) have been lately. As of April 10, 2018 the group was offered at an average 16.4% discount to the actual asset values of the properties held. REITs rarely trade for wider discounts, except during full-fledged recessions. Fortunes have been made by accumulating real estate assets when prices are depressed. It just takes the courage to buy when most people are wary and the patience to hold until their mood lightens. The WSJ's article made the following observation. Investors seem more comfortable buying non-publicly traded real estate funds than listed REITs during periods of underperformance. That conflicts with the actual historical returns of public versus illiquid REITs, which shows the publicly traded versions did better. It seems that not seeing marked-down prices on a brokerage statement is a powerful force. When there are no mark-to-market fluctuations to see, and no way to exit early anyway, people are forced to simply ride out turbulent times. That's a good thing. But why not apply the same logic to buying and holding the superior group of REITs rather than the likely lower-returning non-public variety? Kimco Realty and Simon Property Group are two examples of unjustly beaten-up REITs. Kimco hit an all-time peak of $32.20 in the fall of 2016. On Wednesday, April 25, 2018, KIM fell to its lowest price, $13.16 intra-day, since the dark days of 2010. Late last week somebody must have thrown a switch. KIM jumped 11.63%, to $14.69, by Friday, April 27's close. KIM remains grossly undervalued. During the past eight years it added plenty of value (see table below) while the stock now trades slightly below where it sat on April 27, 2010. Situations like that are most often resolved through catch-up moves where the shares rise, closing the gap between value and price. Simple 12-month, reversion-to-the-mean targets calculate out to $22.62 based on 2018's expected funds from operations (FFO) to $26.79 per share should Kimco's $1.12 annual dividend rate revert back to a more typical 4.18% yield. Those goals appear eminently attainable. KIM peaked between $25.10 and $32.20 during each of the five years stretching from 2013 through 2017. Kimco changed hands as high as $18.40 early this year. Value Line's current take on KIM illustrates investors' quandary regarding the stock. On April 1, 2018, at $14.13, Kimco scored badly on technical factors. The shares offered huge upside, however, on a long-term basis along with a very generous, more-than-8% yield. When short- and long-term factors pull you in opposite directions, go with valuation and patience. You'll almost always be rewarded for taking a long view as the majority of traders have very short attention spans. High-quality Simon Property Group displays a similar pattern. SPG peaked above $229 back in 2016. Last Wednesday it set a new six-year low of $145.78 before sharply rebounding to close on April 27, 2018, at $156.14. SPG reported better-than-expected first-quarter numbers while raising its 2018 FFO estimate to an all-time record level. Like KIM, SPG's share-price performance has lagged its value creation. Good things appear on tap for patient shareholders. They'll collect 5.14% yields along the way. It's easy to visualize Simon Property rebounding to at least $210 within a year. It broke above $200 in 2015, and peaked near $230 a year later. Fundamentals are much stronger today. Value Line was unenthusiastic on SPG for short-term price action. As with KIM the firm recognized the REIT's outstanding three-to five-year potential. KIM and SPG are not the only REITs that look great right now. I chose to feature these two because I have personal stakes in them. You may find others that appear even better. The key takeaway is to respect the numbers, rather than getting caught up in chasing momentum or bummed out due to poor chart action. When logical fair values are well above current quotes the odds are always heavily skewed in your favor.

Buy Good Stocks That Others Are Shunning

Fortunes have been made by accumulating real estate assets when prices are depressed.

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