Businesses change, my needs and available funding change, and hindsight is no friend to most investors - we tend to remember our huge winners and extrapolate that into the future, while ignoring all the mistakes that no longer blink at us every day from our online portfolio summaries.
But some of the stocks I've owned in the past stick with me, most often because I sold them before they really got going, but never had the conviction or opportunity to buy back in. Like many investors, I find it very hard to buy something that I've sold in the past, even if my opinion of the company or my financial circumstances have changed. After all, buying something at a higher price than you had sold it for earlier is to some degree a psychologically humbling admission of defeat.
One company that keeps catching my attention is in just this category: ProLogis (NYSE:PLD). I really wish I still owned this one.
Prologis is a global REIT that owns warehouses and light-industrial distribution facilities. I bought shares in May, 2003 at about $27.50, and sold them in March, 2004 at around $35. I made a nice profit of close to 30%, if you include the dividends. But today, the shares are trading at well over $60, and the company is still performing remarkably well.
So what's so great about this company? It hasn't changed that much in the ensuing three years since I sold, though it's continued to expand in Asia and to generally grow its business.
Here's what I think it has going for it:
1. Great Asian presence: This is expanding today, with its announcement this morning that it's acquired land in several inland cities in China.
2. Market leading position around the world: It is the biggest independent distribution facility owner in the world, and can offer global brands a full suite of services, with a huge presence in North America and Europe and a growing presence in the Far East. This, I think, gives it a great advantage when working with major companies like Unilever (NYSE:UN), who might find a single global provider much easier to deal with than a mishmash of local distributors.
3. Smart financial planning: Prologis is a fast-growing and capital-intensive REIT, which can be a very difficult thing to manage (paying out almost all your earnings as dividends while still investing heavily in your company). It manages this by opening up specialized funds to raise money for property acquisitions, including a recent IPO of a European properties fund and several funds it's opened in the past with Macquarie bank, among others.
And beyond that, the segment it works in has some inherent advantages; it's generally building in light industrial areas, so it doesn't have much in the way of design issues or NIMBY problems like most commercial real estate developers. And thanks to the simplicity of the basic distribution center and warehouse building, it can often put up buildings or expand to adjust to local customer needs in a matter of months.
So why did I ever sell this gem?
Well, in the Spring of 2004 interest rates were just starting to climb, and I thought the relatively meager yield offered by Prologis would start to look less appealing (I think it yielded a bit over 5% at the time, though my memory could be spotty). I also sold my other major REIT holding, General Growth Properties (NYSE:GGP), at the same time, and for largely the same reason. It just seemed that the competition for yield investors was going to get too tough, and the glory days for REITs might be waning.
I was, of course, dramatically wrong on that - not only for ProLogis, but for REITs in general. I take some comfort in knowing that lots of other people were wrong, too, but they weren't playing with my money.
And today, though earnings have gone up somewhat and its portfolio of properties has continued to climb, ProLogis has what I would consider a truly awful yield (for a REIT) of 2.8%. You can get roughly that same yield or better from a market-leading company with a payout of well under 50%, just by investing in 3M (NYSE:MMM) or Citigroup (NYSE:C) or GE (NYSE:GE) or any of a number of the industrial giants of the world.
So there I sat three years ago, thinking that the yield would be the driver for all REIT investments. It looks like I was wrong: If your growth potential is spectacular, you're building distribution centers to serve the strongest industrial areas and densest consumer concentrations in the world, and you manage to get other people to invest in land for you, you can keep growing your REIT until it yields far less than almost any of its competitors.
I certainly never foresaw the strange inverted yield curve that would keep long term interest rates low, and I never thought I'd see the day when a REIT could yield less than 5% (let alone 3%) and still find an unending stream of enthusiastic buyers.
And even though I think it's a great business, I can't buy the shares. I just can't convince myself that this anomaly (a low-yield growth REIT) will remain a stock market darling. Plus, this way there's a chance that someday in the future my decision to sell ProLogis at $35 will seem smart.
Disclosure: I don't own shares in any of the companies mentioned here. Unfortunately. Some companies mentioned may be holdings of mutual funds or ETFs in my portfolio.
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