Huge profits and earnings surprises can lure you this earnings season. But rather than accumulating stocks later, investing in those that are yet to release their numbers and poised to beat expectations can fetch you more gains. This is because an earnings beat essentially serves as a catalyst and raises investors’ confidence in a stock. This leads to rapid price appreciation, ensuring more gains from one’s investments.
Furthermore, buying an undervalued earnings play should translate into great returns when the stock eventually trades at a higher price. This brings us to the REIT industry, which has gained just 2.2% year to date compared with the S&P 500’s return of 10%.
Admittedly, rate hike and cautious approach of investors have deterred gains from this industry so far this year. However, rather than entirely focusing on the rate factor, investors need to keep in mind that the operating performance of this special hybrid asset is highly determined by the dynamics of the individual asset categories. And a number of asset categories displayed strength in second-quarter 2017, with the economy and the job market showing signs of recovery.
Take for example the industrial and office asset categories which hogged the limelight for experiencing high demand. Going by numbers, per a study by the commercial real estate services’ firm – CBRE Group Inc. (CBG) – the overall U.S. industrial real estate market remained upbeat in the second quarter, with the industrial availability rate declining 10 basis points to 7.8%.
This not only marked the market’s 27th decline in the past 28 quarters, but also the lowest level since first-quarter 2001. Obviously, recovering economy and job market gains aided this improvement, but specifically, e-commerce boom and a healthy manufacturing environment were the chief drivers. Also, lower-than-expected completions of construction kept a check on the supply numbers.
In addition, the U.S. office vacancy rate remained steady at 13% in the second quarter amid a balanced demand-supply environment. In around half of the U.S. office markets, vacancy recorded a decline and the national office vacancy rate is hovering close to its post-recession low.
Moreover, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data center REITs are experiencing a boom market. In fact, demand has been outpacing supply in top tier data center markets. Despite enjoying high occupancy, these markets are absorbing new construction at a faster pace.
Additionally, defying concerns about supply in the market, the residential real estate market is back with a bang driven by robust demand levels. Per a study by the real estate technology and analytics firm, RealPage, Inc. (RP), the second-quarter demand level of 175,645 apartments across the nation marked one-third increase from the level witnessed a year ago. This helped occupancy to remain high at 95.0% as of mid-year and led to stabilization in the annual pace of rent growth, which came in at 3.6%, close to 3.7% growth experienced in the first quarter. Notably, job formation and checked move-outs for buying homes acted as the catalyst.
The Zacks Methodology
However, not all REITs are equally poised to excel. In fact, despite the drivers, choosing the right stock could be quite difficult unless one knows the proper method. To make the task simple, we rely on the Zacks methodology, which takes into account a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
