The Motley Fool; By Dave Mock - November 6, 2007
Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements, so if investors want to capitalize on opportunities in real estate markets, for example, they can turn to the iShares Dow Jones US Real Estate ETF, which invests in a representative sample of the Dow Jones U.S. Real Estate index.
Investors get broad diversity, since this ETF invests in a number of real estate investment trust (REIT) stocks, but this also limits their upside. For an investor who was, say, really hip to warehouse real estate but cold on hotel properties, this ETF wouldn't fit the bill.
Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best the real estate sector has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.
The power of tags
To help investors quickly locate great stocks, any of the 5,200 rated stocks profiled in CAPS can be "tagged" with a descriptor, grouping the company with others sharing a certain quality.
With the increased interest in real estate investments, hundreds of REITs have been created that focus on specific real estate sectors. CAPS offers a number of REIT tags to choose from, including "REIT -- Residential," "REIT -- Diversified," and "REIT -- Healthcare Facilities." Looking across these tags, we find hundreds of REITs that trade on American exchanges and show varied performance as a group.
To get a sense of which companies the CAPS community thinks are the best opportunities in real estate today -- and which they recommend staying away from -- we can sort any of these lists by their CAPS star rank, denoted by one to five stars, with five being the best. Each of the individual companies can then be viewed for exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.
Down to the nitty-gritty
Here's a sampling of some REIT stocks our screen pulled up today.
|
Company |
CAPS Rank |
REIT tag |
|
Starwood Hotels (NYSE: HOT) |
*** |
Hotel/motel |
|
ProLogis (NYSE: PLD) |
*** |
Industrial |
|
Simon Property Group (NYSE: SPG) |
** |
Retail |
|
Vornado Realty (NYSE: VNO) |
* |
Diversified |
|
Public Storage (NYSE: PSA) |
* |
Industrial |
Virtually all real estate sectors took the brunt of a significant selloff late in the summer, as the depth of the residential mortgage mess started to unfold. As a result, many REITs are now shunned by investors, with many receiving little love in CAPS. There are a few exceptions, though, such as hotelier Starwood Hotels; more than 93% of investors who rate the company still believe it will outpace the S&P.
With Hilton Hotels now private, thanks to a $20 billion buyout by Blackstone Group (NYSE: BX), Starwood and Marriott (NYSE: MAR) are the two main publicly traded hotel-chain operators in the United States. Many investors like the progress Starwood has made in expanding and maintaining occupancy rates recently, but a few nagging issues remain.
For example, Starwood's earnings multiple of just more than 19 is considerably greater than its expected growth of 14.6% -- leaving the stock well below any "screaming buy" level (even following a recent dip in shares after the company reported lower earnings and lower margins, and guided below analysts' expectations). And the company packed some silver-lined golden parachutes for three of its executives recently, striking a less than friendly-to-shareholders tone.
Another three-star REIT is industrial-property-focused ProLogis, headquartered in Colorado. Many CAPS investors like the REIT's international diversity -- it has properties in Europe and Asia -- as well as the industrial focus that keeps it safely distanced from the subprime fallout. Fellow Fool Michael Leibert makes a compelling case for ProLogis' ability to prosper where others wither, thanks in part to its logistics capabilities, which support customers during times of consolidation. A total of 98 out of the 105 CAPS investors rating the company agree, and they've voted for ProLogis to outpace the S&P going forward.
You can lead a horse to water ...
Plucking individual stocks from a diverse sector such as real estate is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies, rather than blindly taking anyone else's recommendation. After all, even the best stock pickers can be horribly wrong on from time to time.
So, do you agree that hotel REITs are the best places to invest? Or are industrial REITs a better play? Give your own opinion in Motley Fool CAPS.
Several REITs have made the cut in our Motley Fool Income Investor service for their high yield and income potential. To learn more about companies that will pay you to hold shares, check out a free 30-day trial of the service.
