Wednesday Bear Alert - 2016-02-10

There's always a BEAR market somewhere, and I'm here to help you find it.  OK, I'm chiding Jim Cramer a little, but I do appreciate the hard work that he and his most excellent team does in finding good companies and opportunities for the investing public.  But moreover his explaining how these things work better that anyone can be expected.  Hats off to you, Jim.  You're a gentleman and a scholar.

EDIT:  I was terribly remiss!  HAPPY BIRTHDAY JIM CRAMER ! ! !

Bear Alert:

    UDR make look like a bounce play but wait a little and it will fall again.  This thing trades with a P/E multiple of over 90, a Forward P/E of almost 90, a PEG ratio of over 12, and ten times their sales.  But what struck me about THIS REIT is that it is trading at over SIX THOUSAND TIMES ITS CASH.

  That's what I'm seeing.  They just reported on Feb 2, 2016 and their Price to Cash ratio is 6735.93 as I'm reading it off of Finviz.  Now, no one keeps perfect records all the time, but it shocked me seeing this and then that they have a Dividend payout ratio of 120%.  Their Price to Free Cash Flow ratio is 621.  Their Long Term Debt to Equity ratio is 1.24 which seems a bit high given that this is a residential REIT.

    To know more about REITs, I suggest reading a little here.  If this is a Mortgage REIT they may be holding direct mortgages, or they could be holding mortgage-backed securities.  Why is proverbial bell ringing?  I suppose I don't need to tell you that aside from the government, we really don't know where all that debt from 2008 went.  People are flocking to rental units according to some recent news reports and the new home purchases are being made by the wealthy.  Let's hope we don't see a return to sub-prime mortgages, but not all of those ever really got resolved and due to a change in bankruptcy laws in 2005, there was a very sudden spike and then plummet in bankruptcy rates in the US.

    As we can see, even from corporate filings, the rates in the first quarter of 2006 dropped to all time lows, but that didn't mean that there weren't problems as we can see the sudden rise in filings immediately thereafter and leading right into the housing collapse.  Because the bankruptcy laws changed to favor indenture over relief (made it much harder to liquidate, and reorganization left far more debt on the debtor after the bankruptcy than before the change, people and businesses started walking away from their debts.  If we see a return to that, these REITs will see a very sudden drop in rents.

    So all this begs the question, why are REITs trading at such high multiples.  I have nothing against the business model.  In fact I think it's a great way to structure it, but the premiums being paid today represent a terrible risk in my opinion.

    As for UDR's chart, they've broken below their trend.  The daily chart shows a possible bounce materializing, but I think this may be short lived.

    So far, I don't see it as a broken company so much as an over-priced stock.  You might paper-trade the bounce for a little gain, but one bad news announcement could trash that trade.  I wouldn't swing trade (hold over night) UDR - not even a paper trade.

    I plan to release a special post, in addition to my theme this week, about the new NIRP environment we find ourselves in.  Warning: it won't be pretty.

Disclaimer: This blog is for informational purposes only.  I may or may not have positions, long or short, in any stock or security mentioned anywhere on this site or elsewhere at any time.  It is the sole responsibility of the reader to interpret the contents here, and to seek the advice of a qualified financial professional before engaging in any trade.