Real estate stocks take the reins

After a long period of underperformance, REITs are on the move again.

By Anthony Mirhaydari Dec 21, 2010 6:29PM

Stocks have had an impressive few months. The major averages are trading at new multi-year highs. And the S&P 500 is up nearly 21% from its late-August low. But not all stocks have participated equally. 


Real estate stocks in particular have fared poorly. The iShares Real Estate (IYR) -- which tracks the performance of a collection of high yield REITs -- has lost nearly 10% on a relative basis compared to the S&P 500 over this period.


That's changing now. With bonds selling off, cautious investors are gingerly stepping back into stocks. As a result, real estate stocks have outperformed the broad market over the last three days -- and the sector looks ready for more. Here's why, along with a fast moving recent IPO that looks ready to soar. 

 

First, the rationale for the recent change of heart is clear: Bonds are under pressure. According to the mutual fund flow experts at EPFR, bond funds recently posted their largest net outflow since October 2008. With the economy strengthening and inflation fears on the rise, investors are moving cash into stocks. EPFR notes that equity funds have taken in more than $10 billion in each of the last two weeks of data.

 

Given that retail investors are just now starting to move cash out of bonds and into equities, it's clear that caution and skepticism still dominates.

 

After all, the S&P 500 up more than 88% from its bear market low and has erased the losses associated with the collapse of Lehman Brothers in late 2008. So it makes sense that REITs are perking up now since they are some of the most bond-like equities. The IYR offers a 3.7% dividend yield in addition to the potential for price appreciation. Compare that to the 3.4% yield on 10-year Treasury notes.

 

For those looking for general exposure to the sector, the IYR or the leveraged Direxion Daily Real Estate Bull 3x Shares (DRN) are both worth a look. More specific exposure can be found in the following:

 


CoreSite Realty (COR) IPO'd back in September -- right in the maw of the underperformance mentioned above. A steady slide ensued that saw that stock lose 23% from its initial offer price.

 

Things are turning around now with the stock moving up and over downtrend resistance as technical measures strengthen. The company operates computer data center sites which are becoming increasingly popular in the era of "cloud-based" computing.

 

If COR is a little too risky for you, other good candidates include Kimco (KIM), Health Care REIT (HCN), and Highwoods Properties (HIW).

 

Disclosure: Anthony has recommended COR to his newsletter subscribers.

 

Be sure to check out Anthony's new investment advisory service, The Edge. A special free trial has been extended to MSN Money readers. Log in using the following credentials: user name: freeuser; password: msn

 

The author can be contacted at anthony.mirhaydari@live.com. Feel free to comment below. 

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