This Week's Bear Alert and Focus - REITs.

I think the next segment to get it from the Bear Market, after Tech, will be REITs.  I've been looking over the fundamentals and to say the least, it's shocking to me.  I'm not a financial professional, I'm an engineer, but when there are several companies in a sector who are paying 1.14, 1.45, 3.21, 3.00, 6.36, 8.5, and 16 (that's right SIXTEEN) times earnings in dividends this simply cannot be ignored.

 The P/E ratios for the companies I've identified range from over 32 to OVER 1,600.  Their forward P/E ratios stretch well into the hundreds.  Several of them have recent insider selling happening, and many have very high institutional ownership.  I have to wonder... How many of these REITs are bundled into ETF and ETN products?  I think that when the music stops, which may be very soon, we'll find out that the properties in these REITs may very well be over-valued and the share prices will fall like comets.

I'm going to post at least one company each day this week to highlight what I see as trash in this sector - not because the company is necessarily bad, but because the stock is trading at WAY TOO HIGH a price.  If you're paper-trading these stocks, you might want to get out, short it, or just steer clear.

I'll start with REXR.
BEAR ALERT

    Let's just start with the fact that REXR is trading at a 1,690 P/E ratio.  They pay a healthy 3.23% dividend so they're good, right?  But that dividend is 34% of their sales which might be OK for a REIT, but it's 54 times their earnings.  FIFTY FOUR!

    REXR is currently trading at the top of it's channel at $16.74 and is just off of its all time high.  Not bad for a company with a book value of $12.30 per share.

With it being an industrial REIT and the World's economies slowing, how well will the property valuations hold up?  Will they still be able to get income from their tenants if we go into a recession?

    REXR may or may not be a well managed company, but with market sentiment being what it is today the valuation seems a bit too high.  I would paper-trade this as a short sell or with buying Put options. If I bought 10 of the $17.50 Puts expiring on Feb 19th for $0.81 a piece, I'm taking rather low risk, but I would gain $1000 for every dollar it drops below $16.69 at expiration or I could sell those puts when I reach a 100% profit ($1.62 per contract - doubling my money).  This is better than I could do by shorting but the position is smaller than what I would have by shorting the stock.  It's a trade-off.

    For those not familiar with options pricing, the contract price is multiplied by the number of shares in the contract (100) so the REAL price per contract is 100 times the quoted price.  10 contracts represents a lever of 1,000 shares.


Happy trading everyone.