Why REITs Will Soar in 2018 (and 5 to Buy Now)

The REIT bears have gone too far this time.

In the past few days, I’ve seen a lot of panicky commentary warning that incoming Federal Reserve chair Jerome Powell will raise rates too fast after he takes over in February—and that would be a disaster for real estate investment trusts (REITs).

Don’t take the bait.

Because it all adds up more fear-fanning headlines from a business press desperate to make something out of nothing.

I’ll show you why in a moment. Then we’ll move on to 3 corners of the REIT space (and 5 stocks in particular) that underperformed in 2017—and are poised to spring back big time in 2018.

The Powell Factor

First, unless you’ve been avoiding the Internet and all newspapers for the last 6 months, you know the Fed plans hike rates further this year.

My colleague Michael Foster rattled off the reasons why in a November 21 article, but they boil down to rising wages, falling unemployment and an uptick in inflation, though it’s still below the Fed’s 2% target. That’s got futures traders pegging the next hike for the Fed’s March 21 meeting.

Source: CME Group

But whether we get the 2 rate hikes the market expects this year or 3 or more, as some talking heads predict, we can be sure of one thing: Powell will steer the same course as his predecessor, Janet Yellen.

How do I know?

Because he’s never dissented on any Fed decision since becoming a Fed governor in 2012, according to MarketWatch.

Which brings me to the relationship between rates and REITs, a linkage most people have 100% backwards—handing us a terrific opportunity to profit.

The Truth About Rates and REITs

Most folks think rising rates hurt REITs for 2 reasons.

The first: higher rates increase REITs’ borrowing costs … and it is true that REITs usually carry above-average debt to finance property purchases and renovations.

The second: that rising rates make so-called “safe” investments like CDs and Treasuries more appealing to income seekers compared to REITs.

Let me take the second point first.

As I write, the 10-Year Treasury yield sits at 2.5%, while the benchmark Vanguard REIT ETF (VNQ) pays nearly twice as much—4.3%. And plenty of REITs pay more, like a hotel operator I’ll show you in a moment that yields 7.0% today!

I think you’ll agree that this is still a big gap to close, and it will be a long time—if ever—before CDs, treasuries and the like manage to pull it off.

As for the first point, rising rates do increase REITs’ borrowing costs. But that’s only half the story! Because those hikes also come with a hot economy, which drives up rents and demand for the offices, warehouses, apartments and other properties REITs rent out.

The result? A rise in funds from operations (FFO, the REIT equivalent of earnings per share) that dwarfs higher interest costs and ignites REIT share prices.

If you don’t believe me, check the history. This is exactly what happened from July 2004 through June 2006, when the Fed hiked rates from 1.25% to 5.25%, and 10-year Treasury yields spiked to 5.14%.

How did REITs do? They soared 48%, including dividends, nearly tripling up the S&P 500’s gain.

Biggest REIT Myth Busted

The takeaway? Now is the time to buy REITs … especially if you see any of the ones on your watch list take a dip around the time of a rate-hike announcement (watch for that around March 21).

5 Top REITs From 2017 That Are Primed to Soar in ’18

To get you started, I’ve pored over my last 12 months of ContrarianOutlook.com articles to bring you 5 solid REITs, each from a different part of the REIT market.

They are: hotel operator Hospitality Properties Trust (HPT), healthcare property owner National Health Investors (NHI), apartment landlord Essex Property Trust (ESS), self-storage manager Public Storage (PSA) and government building owner Easterly Government Properties (DEA).

All have strengths that safeguard our cash and set us up for gains in 2018. HPT, for example, owns 323 hotels that focus on business travelers and operate under household names like Radisson, Holiday Inn and Marriott. The REIT also cuts its reliance on hotels with its 199 Petro and TA travel centers, all of which are located along the interstate highway system.

These are terrific businesses that will grow as trucking freight volumes zoom ahead 3.4% annually through 2023, according to the American Trucking Association.

Essex, meanwhile, boasts 59,240 apartment units in prime West Coast markets like San Francisco and LA.

As I told you in a December 7 article, Essex is cashing in as millennials skip home ownership in favor of posh downtown pads, while baby boomers swap their suburban addresses for similar abodes. (Self-storage names like PSA, by the way, benefit from these exact same trends.)

Meantime, National Health Investors and Easterly Government Properties add ballast to our portfolio. NHI provides financing for steady medical tenants such as seniors’ housing facilities and specialty hospitals, while Easterly rents its 46 sleek, modern properties to government tenants like the FBI.

Your 5-REIT Portfolio: What the Numbers Say

So with that, let’s put our 5 REITs to the test, starting with 3 crucial numbers for us income hounds: dividend yield, dividend growth and payout ratio (dividends as a percentage of core or normalized FFO; a vital measure of dividend safety).

As you can see, these 5 names give us a nice mix of high yields and dividend growth. (A side bonus: as I recently showed you in an example using Boeing (BA), a rising payout is the No. 1 driver of stock prices.)

And all of those payout ratios (including DEA’s 85.4%) are easily manageable for these REITs, which benefit from rock-solid tenants (who wouldn’t want to rent space to Uncle Sam?) and high occupancy rates—DEA’s currently sits at an unheard-of 100%!

Finally, there are some real bargains in this bin. HPT, for example, trades at a ridiculous 8.3 times adjusted FFO, with NHI and DEA at an attractive 14.5 and 18.2 times, respectively.

It’s no surprise that the two priciest trusts are Essex (20.3 times core FFO) and Public Storage (20.6). But those are fair prices (they’re both below the S&P 500’s 21.8 and down from a year ago) considering these are two of the fastest dividend growers in our basket.

My take? I expect REITs to do a big U-turn in 2018, when the market finally realizes rising rates aren’t a threat—and these 5 are in a great position to benefit.

Revealed: The Best 8% Dividend for 2018

My top REIT pick for 2018 boasts an even higher dividend than any of the 5 trusts above (8% as I write this) and grows its payout every single quarter.

In fact, this powerhouse REIT has increased its payout for 21 straight quarters, so your forward yield is actually 8.4%, given that we’re going to see 4 more dividend hikes this year!

The best part? You can buy in cheap, at just 10 times FFO!

However, I expect this stock’s valuation and price to rise 20% in 2018 as the herd finally gets used to the fact that rising rates are here to stay—and that they’re actually a benefit to REITs.

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Source: Banyan Hill 

10 Strong Buy Stocks From 2017’s Best Analysts

What are the top analysts who consistently get it right recommending strong buy stocks for 2018? TipRanks tracks and measures the performance of over 4,700 analysts to identify the top expertsin each sector who consistently outperform the market.

Analysts are ranked based on two crucial factors: success rate and average return per recommendation. Following the top analysts of 2017 is also an effortless way to find under-the-radar stocks that experts believe have strong investing potential. For this piece, however, I went one step further.

I searched for the double whammy of 1) stocks specifically recommended by the Street’s top analysts and 2) strong buy stocks that also have the backing of Wall Street.

That’s why here I only include stocks with a ‘Strong Buy’ analyst consensus based on the past three months of ratings. Using this consensus, investors can be reassured that these stocks are the crème de la crème as far as the Street is concerned.

Bearing this in mind, let’s dive in and take a closer look now:

Strong Buy Stocks: Lam Research (LRCX)

Source: shutterstock

B Riley FBR analyst Craig Ellis is the No.1 analyst out of over 4,700 analysts tracked by TipRanks. No wonder — he has an impressive 81% success rate and 37% average return over 391 ratings. Right now he is singing the praises of chip equipment maker Lam Research Corporation (NASDAQ:LRCX). He says the recent blow out results for chipmaker Micron “support the case for Memory strength to continue well into C18 albeit with DRAM tighter than NAND.”

Positive factors include “steadily increasing end demand diversification and rising system content to meet the Tech industry’s various next-generation initiatives.” As a result, Ellis is confident that bear concerns about a massive NAND correction next year are overblown.

Indeed, he sees LRCX spiking from $192 to $250- the Street’s highest price target yet.

Overall this ‘Strong Buy’ stock scores 11 buy ratings versus just two hold ratings from top analysts in the previous three months. These analysts have an average LRCX price target of $222- –15% upside from the current share price.

Strong Buy Stocks: First Data (FDC)

First Data Corporation (NYSE:FDC) offers retailers card and mobile payment acceptance capabilities for both online and point-of-sale transactions. Right now, it’s one of the largest payment processing companies in the world with 6 million business locations. Top Barclays analyst Darrin Peller sees First Data soaring 44% to hit $24 in the coming year.

Peller reiterated his “buy” rating on the stock on Dec. 5. He says his channel checks and “deep dive” analysis reveal that First Data’s risk/reward ratio is “compelling” into 2018. The analyst sees 2018 as an inflection point for the company’s joint venture channel growth.

In total, First Data has received seven buy ratings and two hold ratings from analysts in the past three months. While Peller is much more bullish than consensus, the average analyst price target of $21 still suggests 26% upside from the $16.60 share price.

Note that Peller is one of the Top 100 analysts tracked by TipRanks.

Strong Buy Stocks: Apple (AAPL)

4 Reasons Apple Inc. (AAPL) Stock Investors May Want to Reconsider Their Trade

Source: Shutterstock

Heading into 2018, Apple Inc. (NASDAQ:AAPL) has retained its ‘Strong Buy’ analyst consensus rating. In the previous three months, analysts have published 21 buy ratings and seven more cautious hold ratings. If we look at the $191 average price target from all these analysts, we find potential upside of 11%.

Encouragingly Key Banc’s Andy Hargreaves is optimistic on AAPL, even without blockbuster iPhone sales. He says: “We do not expect upside to consensus iPhone unit estimates [of 240 million] in FY18.” Instead, he is looking for sales of 237 million units for 2018 and warns that the multi-year sale cycle could be short-lived.

Ultimately, however, this doesn’t dampen his overall take on the stock:

“Despite our slightly dour view of iPhone units, we continue to believe the combination of increased iPhone prices and growing services revenue will drive upside to consensus gross margin estimates in FY18. This should drive upside to consensus EPS expectations, even if iPhone units are only in line.”

This five-star analyst reiterated his buy rating with a $192 price target (12% upside).

Strong Buy Stocks: Alexion Pharma (ALXN)

Source: Alexion Pharmaceuticals

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is a U.S. pharma company best known for its development of Soliris, a drug used to treat rare blood disorders. ALXN has the thumbs up from top Cowen & Co analyst Eric Schmidt. Bear in mind this analyst is generating one of the highest average returns of over 40% per rating.

Schmidt is confident that Alexion can explode 44% from just $125 to $180. He calls Alexion a “top large-cap pick” with a $1 billion opportunity in autoimmune disorder generalized myasthenia gravis (gMG). Soliris has now been approved in Europe, the U.S. and, on Jan. 3, Japan. Schmidt is now expecting a “robust” launch for one of the world’s most expensive drugs, at $700,000 per patient per year.

In total, Alexion has scored 11 buy ratings and only one hold rating from analysts in the past three months. These analysts are predicting that Alexion will rise 31% to reach $164.

Strong Buy Stocks: Chevron (CVX)

California-based oil giant Chevron Corporation (NYSE:CVX) is an interesting pick. Why? Well initially it only has a “Moderate Buy” analyst consensus rating. But if we look at only top analyst ratings the consensus shifts to Strong Buy.

In fact, top analysts have 100% support for CVX with only buy ratings in the last three months. These best-performing analysts see the stock rising over 9% to hit $140.

Cowen & Co’s Sam Margolin gets it right 87% of the time. He also has an average return of over 20% per rating. In respect of Chevron, Margolin is the Street’s most bullish analyst. On Dec. 20, Margolin ramped up his price target from just $122 all the way to $160 (24.5% upside). Chevron is looking appealing right now for three key reasons: 1) accelerating free cash flow; 2) increasing Permian asset value due to operational execution; 3) its dividend yield of 3.36%.

“We see progress along those fronts in 2018 accelerating, and it should be relatively easy for investors to keep track of the data outcomes that can drive the stock directionally. With metrics trending in the right direction, the ultimate valuation of the stock, in our view, can be underpinned by 30-year averages in key cash-based metrics” comments Margolin.

Strong Buy Stocks: Centene Corp (CNC)

Centene Corp (NYSE:CNC)

Source: Shutterstock

‘Strong Buy’ healthcare stock Centene Corporation (NYSE:CNC) is winning analyst acclaim after publishing strong 2018 guidance. The company is a multi-line healthcare enterprise that provides services to government healthcare programs. Following an upbeat investor day, top Oppenheimer analyst Michael Wiederhorn boosted his price target from $111 to $122 (17% upside).

He says the day “highlighted the strong growth opportunities within a $1.9T pipeline ($255B targeted), largely consisting of new Medicaid populations, along with the promising opportunities within the Medicare Advantage and Exchange markets.” And this is a long-term investing prospect says Wiederhorn. He sees Centene “continuing to boast strong revenue and earnings growth prospects for years to come.”

The overall Street picture on Centene is also very promising. In the past three months, CNC has received seven buy ratings and one hold rating. This includes Wells Fargo’s Peter Costa adding Centene to Wells Fargo’s Priority Stock List on Dec. 19 as he believes shares look undervalued right now.

So, too, does the Street: the stock’s $119 average analyst price target suggests 15% upside potential.

Strong Buy Stocks: FedEx (FDX)


Five-star Argus Research analyst John Eade is betting on courier leader FedEx Corporation (NYSE:FDX) for 2018. On Dec. 26, he bumped up his price target to $290 from $245 previously. Given the stock is currently trading at $262, this indicates upside potential of over 10%. The move came following an impressive Q2 earnings beat and raised FY18 outlook.

He says the company should execute with future efficiencies and margin improvement thanks to the “well-respected management’s” continued cash injections. Specifically, management is showing increased focus on expense control in the Ground segment. On top of this Argus believes that FY18 will reap the benefits of falling fuel costs and higher shipping demand.

Following a flurry of analyst “buy” ratings and price target increases, 14 out of 15 top analysts are bullish on the stock. The average price target from these analysts: $278.

Strong Buy Stocks: Owens Corning (OC)

Source: Shuttertstock

Owens Corning Inc (NYSE:OC) is a key analyst pick for 2018. This is a global company that develops and produces insulation, roofing and fiberglass composites. Top RBC Capital analyst Robert Wetenhall is the most bullish analyst on OC right now. He says the stock will go to $112 (19% upside) because of recent M&A activity and strong execution.

On Dec. 4, Wetenhall underscored his confidence in the stock when he upgraded Owens Corning from outperform to “top pick.” He explained: “Our expectations for double-digit EBITDA growth, robust free cash flow generation and multiple expansion inform our Top Pick rating and give us confidence that the stock will rise even after strong year-to-date performance (+70%).”

Overall, Owens Corning has a “strong buy” top analyst consensus with a $94 average price target. This breaks down into six buy ratings and one hold rating in the last three months.

Strong Buy Stocks: Alibaba (BABA)

Risks Abound for Alibaba Group Holding Ltd (BABA) Stock Price

Source: Shutterstock

Chinese e-commerce leader Alibaba Group Holding Ltd (NASDAQ:BABA) is currently trading near the high end of its one-year range. But analysts are optimistic the stock has even further room to grow in 2018.

Indeed, Alibaba has received only bullish buy ratings from analysts for over half a year now. The average price target from the last three months of ratings alone comes out at $213- 14% above the current share price.

Five-star Stifel Nicolaus analyst Scott Devitt recommends buying BABA for exposure to China’s rapidly growing middle class. He points out that the Chinese eCommerce market can exceed $1 trillion worth of sales by 2019. And BABA looks set to capitalize on this with “well-managed and well-positioned leaders”.

Meanwhile, BABA also has the technical support from China’s broad and efficient telecommunications infrastructure. This continues to increase BABA’s ability to grow its online customer base. And at the same time, BABA’s online/ offline new retail strategy means it has all shopping preferences covered.

Strong Buy Stocks: Broadcom (AVGO)

Semiconductor behemoth Broadcom Limited (NASDAQ:AVGO) is consistently one of the Street’s top stocks. And it looks like the situation is no different for 2018. In the last three months, AVGO has received an incredible 26 consecutive buy ratings.

No hold ratings or sell ratings here. These analysts see the stock trading up by over 18% from the current share price. Top Oppenheimer analyst Rick Schafer has just called AVGO his best stock idea for December-January. He says, “We believe AVGO has one of the most strategically and financially attractive business models in semiconductors.”

Schafer lists four key reasons for his positive outlook on AVGO. The company has 1) a sustained competitive advantage in the growing high-end filter market; 2) a highly diversified, differentiated and “sticky” non-mobile business offering; 3) and efficiently managed manufacturing advantage; 4) substantial EPS and free cash flow accretion heading its way from the Broadcom and Brocade acquisitions.

So far Schafer seems to know what he is talking about when it comes to AVGO. Across his 37 ratings on the stock, he boasts an impressive 93% success rate and 41% average return. Even better, the company is also an attractive dividend stock and recently paid a dividend of $1.75, up from $1.02 the previous quarter.

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