Selecting A REIT From The Top Down

Summary

  • I recently made a couple REIT recommendations using a macro approach that turned out well.
  • Now might be the time to begin shopping for REITs.
  • When buying a REIT, I want a high, but sustainable dividend yield.
  • Chatham Lodging Trust is the first place I would make a medium-to-long-term REIT purchase.

Introduction:

Last month I made two REIT recommendations using a macro approach. The first was made on November 3rd, and I noted that there was disconnect between Fed rate expectations and REIT stock prices. At the time I thought STAG Industrial (NYSE:STAG) was worth shorting because I expected as the December Fed meeting came closer, the market was likely to drive down the price of REITs and STAG had shown itself to be particularly vulnerable to an expected Fed rate hike. I predicted a 10%-15% price decline for STAG leading up to the meeting. This was purely based on the market perception of STAG and not based a fundamental analysis of the company.

Two weeks later, after STAG had dropped over 6% and rate expectations had risen, I felt the risk/reward was no longer favorable enough to continue shorting, but that it wasn't yet time to buy REITs because prices were likely to fall more as the actual Fed meeting approached. Here is what STAG has done since my initial prediction of a 10%-15% drop:

STAG Chart

STAG data by YCharts

It is now within the predicted range at the predicted time. I have received a couple of messages asking about my current thoughts on REITs going forward. While I am not a REIT expert, one of the rules I have for myself when it comes to writing articles is to provide readers with something that is both actionable and measurable. This self-imposed rule is both for the benefit of readers and for myself. It forces me to sometimes be more bold than I otherwise would be, and sometimes be more cautious. This article is my attempt to provide an actionable REIT suggestion for those shopping for REITs from "the top down" who are not REIT experts. I highly advise readers to follow up my recommendation by reading the research of those

This article was written by

Cory Cramer profile picture
20.21K Followers
One-of-kind research using historical cycles to identify tops and bottoms

My analysis focuses on the cyclical nature of individual companies and of markets in general. I've developed a unique approach to estimating the fair value of cyclical stocks, and that approach allows me to more accurately buy near the bottom of the cycle.

My academic background is in political science and I hold a Bachelor's Degree and a Master's Degree in political theory from Iowa State University. I was awarded a Graduate Research Excellence Award in 2015 for my research on conservatism.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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