Seeking Alpha
, Small Cap Gems (636 clicks)
Long only, contrarian, special situations, value
Profile| Send Message|
( followers)  

Summary

  • The market has threaded water in the first quarter, this action is likely to continue in the second quarter as equities consolidate 2013's huge rally.
  • High yield sectors and stocks have outperformed so far in 2014 and should continue to do so in the second quarter.
  • Below are two attractive real estate investment trusts that have been recently been upgraded by analysts and provide solid yields.

"Only the man who crosses the river at night knows the value of the light of day" - Chinese Proverb

As we enter the last trading week of the first quarter, it is probably a good idea to do a status check on the market so far in the New Year. Equities are tracking to their worst performance since the fourth quarter of 2012.

Consensus forecasts for interest rates to continue to rise in an incremental manner along with the market rising in tandem have fallen flat so far in 2014. The yield on ten year treasuries have fallen from the 3% level they began the year at and the market is struggling to post slight gains for the quarter.

I have been fortunate to outperform the overall market by several percentage points early in the New Year. A good portion of this outperformance is the result of shifting to low beta/high yield stocks and sectors near the end of 2103. These plays have outperformed the market so far in the first quarter of 2014.

I did not believe interest rates would increase that much over 2013's ending levels as I am skeptical the economy can grow at a 3% GDP rate or more as most pundits had penciled in for 2014. I also think the Federal Reserve's efforts to slowly withdraw from its extraordinary liquidity measures will have deeper impacts that most investors currently are assuming. I believe we will spend the first half of 2014 consolidating 2013's over 30% rally.

I continue to like high yield sectors like real estate investment trusts (REITs) to beat the overall market in the second quarter. Here are two attractive REITs that recently received analyst upgrades that I will be looking to add during the next downturn in the market.

Brandywine Realty Trust (NYSE:BDN) is a publicly owned real estate investment trust. The firm invests in real estate markets of the United States. It makes investments in office, mixed-use, and industrial properties. Their properties in aggregate total 40 million square feet in select markets across the nation.

Brandywine was initiated as a "Buy" at MLV & Company this morning. The firm has a $17 a share price target on the shares which currently goes for just over $14 a share. MLV likes "efforts over the past few years to focus its portfolio on the submarkets where the company has a strong portfolio and good market fundamentals". BMO Capital recently upgraded the shares to "Outperform" and has a $16.50 a share price target on the REIT.

The shares yield 4.2%. The REIT goes for approximately 20% above book value and sells for a bit over 9x 2015's consensus FFO (Funds from Operations). FFO growth should be in the range of 5% to 8% annually over the next two fiscal years. I look for a dividend hike for the first time since 2009 over the next 6-12 months on improving fundamentals.

First Potomac Realty Trust (NYSE:FPO) is one of the leading owners of office and business park properties in the greater Washington, D.C. region. This REIT sports a market capitalization of $750mm with an enterprise value near $1.4B.

D.C. has remained one of the hottest areas for job and economic growth throughout the financial crisis and the years afterward. Despite pleas of "austerity" and debt falling as a percentage of GDP (Thanks in part to ultra-low interest rates and coming off historical high levels), the fact is that government spending remains more than $1T annually above pre-crisis levels. This trend will continue to be supportive of real estate throughout the "beltway".

The shares yield 4.7% at current levels and the stock is price just above $14 a share. MLV & Company initiated the shares as a "Buy" with a $16 price target this week. Among the reasons the analyst firm is positive on First Potomac are "We expect FPO to continue to report positive net absorption in 2014 as the D.C. market recovers - occupancy increased 320 bps in 2013 to 88.1%; government spending is expected to grow again in 2014 and be above long-term averages in 2015". Jordan Sadler, a five star rated analyst according to Tipranks, from Keybanc also has a "Buy" rating on the shares.

Source: 2 Solid Yield Plays Receive Upgrades