A Contrarian Play: Sell Gold, Buy REITs And Home Builders

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 |  Includes: GLD, IAU, LEN, PCL, PSA, SPG, TOL, VNO, WY
by: Brett Korsgaard

I am sympathetic to the core reason behind the essential quadrupling of the price of gold over the past decade: monetary policy has made a mockery of any notion that fiat currency can exist as a legitimate store of value. When a dollar or a euro goes back to the gold standard- then it can regain such legitimacy, but until then gold remains the closest thing to true money. I also counter that gold is not exempt from the prevailing "conventional wisdom" that can and does drive almost any asset be it tulips, tech stocks, land, houses and various other commodities that humans are want to invest or speculate in.

A Better Store of Value: Less Expensive Real Estate Assets

Company Yield Market Segment Summary
Vornado Realty Trust (NYSE:VNO) 3.2% Commercial & Office A titan of office and commercial. Heavily invested in core urban markets.
Simon Property Group (NYSE:SPG) 2.9% Retail A leader in investment in regional malls and outlets. Diversified with a global footprint.
Public Storage (NYSE:PSA) 2.9% Self Storage Among strongest players in self-storage business. Booming in a down economy.
Plum Creek Timber (NYSE:PCL) 4.6% Timber Timber has some of the most surprising returns over time. For patient money but with a very nice yield.
Weyerhaeuser (NYSE:WY) 3.5% Timber, Wood Products Huge footprint in all things timber: lumber and lumber derived products: flooring, paper pulp, etc. Economically sensitive but with pent up earnings power in a recovery.
Lennar Corporation (NYSE:LEN) .8% Home Building One of the nations largest home builders with significant holdings of land.
Toll Brothers (NYSE:TOL) N/A Home Building Huge cash position and desirable footprint of land holdings in urban corridors make this a long term hold.
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There is a store of value in most any hard asset, but the price paid does have a bearing on the potential for retention of value. Gold has a store of value at $300 an ounce, $800 an ounce or $22000 an ounce. But is that store of value a moving target not exempt from manipulations by hedge funds and the madness of crowds? For those who think equities are manipulated on Wall Street I have a surprise for you: so is gold. With the advent of exchange traded funds such as GLD (Spider Gold Shares) and IAU (iShares Gold Trust), gold as a securitized asset has been unleashed to all manner of manipulations. Just like Wall Street got a hold of your friendly neighborhood home through the sale of CDO’s and the juicing of the credit bubble, they can and are getting a hold of commodities and precious metals. Unfortunately, when manipulation comes into play what comes up usually does go down.

What I have learned in my investing career is this: when the general public gets enamored of something, and when the masses are bombarded with ads extolling the virtues of gold, real estate, or stocks, that is generally a fair warning that it is time to give that asset class a miss. Better yet, time to sell and move capital to areas that better represent that proverbial “store of value”. This point seems to be lost on hardened gold bugs who are likely to see gold’s parabolic rise and fall and be harrumphing the same platitudes that they were during gold’s twenty year slumber while most other assets appreciated.

Value is a Relative Term

It is better to be flexible in one’s appraisal of value because it is easy to be deluded by prevailing sentiments. There are stores of value in any of the fore mentioned asset classes and right now equities, real estate and land offer far more in the way of intrinsic value. Houses can be acquired at half their replacement value in many markets; they can also offer a better rental yield than at any time in recent history. THAT is value. The value of land has plummeted as it has gone from being a developers dream to something that nobody wants because in the near term there is no reason to build and demand for development is weak. That too is value albeit an extremely illiquid sort. That will change in parts of the country that will continue to attract jobs and population growth: think the Sunbelt states that have been hit hardest by the real estate bust.

Demographic shifts and people wanting to move to Florida, California, Arizona and Nevada are long-term structural trends that will likely remain intact. There are pockets of value in the developing world as well. There was value in Brazil at the onset of the millennium. There were tremendous values in Asia and Hong Kong after the financial crises that hit these areas hard before the end of the millennium. There were ridiculous values in Argentina after the 2002 devaluation. Ranchos could be had for pennies on the dollar. That was the time to buy. This is a world which will reward big thinkers and many big thinkers bought gold when nobody thought much of it at $300.00 an ounce when it was largely ignored. It was a store of value then as it was now. But the value in relative terms were extreme.

How to play the discrepancy between precious metals and real estate? Sell those shiny metals while they still sparkle and buy the right REITs, home builders and land holders- many of whom have tons of cash on their books and vast holdings of prime real estate that spin out a very decent yield year in and year out. The best managed of these companies are using the downturn to pick up office buildings, land parcels and timber holdings at reduced prices. The return on invested capital is reaching double digit numbers that haven’t been seen for decades. This makes for a better investment then something that just sits “and stares back at you” as Warren Buffett once said of gold. The above is a list of some of the “best in class” REITs and homebuilders. All have the balance sheet strength to create value in the near term with recent acquisitions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.