The volatile (perhaps even irrational) market behavior this month provides a different kind of investment opportunity. Instead of finding an exceptional company and utilizing a small dip in price as an entrance point, these conditions allow us to use an exceptional dip in price as an entrance point into an average company. Each of these stock's prices fell excessively since the start of the month. Four of these I believe to be interesting opportunities while the other two serve as good examples of false positives.
Closing Price on 5/18/12 $
Market price on 5/1/12 $
% drop in price
Annual Yield %
(based on 5/18)
Pennsylvania REIT (NYSE:PEI)
Medical Properties (NYSE:MPW)
Sabra Health Care (NASDAQ:SBRA)
Glimcher Realty Trust (GRT)
Ashford Hospitality Trust (NYSE:AHT)
Prologis Inc. (NYSE:PLD)
Of course, a price dip alone is insufficient to show opportunity, but if the price drop is demonstrably not related to performance it becomes a powerful indicator. Understanding what caused any given price drop and its actual effect on each company is essential to use this as a metric of opportunity. Below is a brief description of each of the companies that have significantly discounted prices. These descriptions are only superficial and further research is crucial before investment is made.
Pennsylvania REIT is a long standing company that leases shopping malls. It is in the process of renovating many of its older malls and funded this through issuance of a new preferred. With an 8.25% coupon and a redemption date of 4/20/17, the preferred proves to be a good source of long term yield. As for its common, an estimated price/FFO of 6.7 (by far the lowest in the retail sector which averages 14.32) serves as a strong indicator of its value. Having recently raised the dividend on its common to $0.16 quarterly it also generates decent yield.
Medical Properties Purchases hospitals from their operators and leases it back on a long term lease. This simultaneously frees up capital for the operators and generates a long term revenue stream for the REIT. While 6.87% is a massive drop, it is a false positive as it outperformed the REIT market as a whole which dropped 7.94% over the same time period.
With an exceptional yield of 9.61% if purchased at $13.73 Sabra Health Care (SBRA) certainly was an excellent opportunity. Since then, the price has risen to $14.21 (5/25/12) so the profit margin has diminished. That being said, it is a well-diversified healthcare REIT with plenty of room for growth.
Like PEI, Glimcher Realty is a shopping mall REIT. With a portfolio focused on high-end malls in metropolitan areas, it only has ownership in 27 properties despite its $1.27B market capitalization. GRT also offers a pair of high yield preferreds to choose from.
Ashford Hospitality Trust
Ashford Hospitality Trust is significantly discounted from an already discounted price. Having traded over $10.00 as recently as March. This company has a superb management team and has exemplary growth potential if it can overcome its heavily leveraged position.
Despite its discount of nearly 14%, Prologis Inc presents us with our second category of false positives. As a global industrial real estate developer, PLD has a portion of its portfolio in Europe and is consequently directly affected by the event which caused this erratic behavior. As such, any price fall can be, at least partially, attributed to an actual or anticipated decline in performance.
While some of these opportunities have closed, we can use the recent market behavior as a reminder to be prepared and diligently watch for similar events. Volatility of sufficient magnitude can create value out of otherwise unimpressive stocks. Additionally, the value entrance prices can provide exceptional yields that are not found under stable conditions.
Disclosure: 2nd Market Capital and its affiliated accounts are long PEI, MPW, SBRA, and AHT.