Everyone is having fun trading FNMA today. I, however, have opted for a less exciting afternoon, looking for broad market clues and building a watchlist of stocks that can last the test of time.
The IYR is down another 2.5% today. Let me explain to you why this is happening.
REITs enjoy a very low rate environment. Because of these low rates, they’ve been able to finance projects at extremely low costs. REITs live and die by the credit markets and are valued based upon their NAV, which is based upon their balance sheet. If rates are heading higher, that is a material downside event for their balance sheets and NAV, which in turn means the stock prices need to go down.
But are rates really going higher? Do we really think the Fed will allow this to happen?
I am skeptical of anyone who shorts The Bearded Clam, for he has made me fortunes since 2009. Assuming I am correct, the REITs are great buys down here.
We must take a look at O, SBRA, MPW,JMI, AVIV and other hard hit REITs.
I am going to narrow down my watchlist to a few good REITs and begin buying them soon. I am respectful of market forces and will allow for the stocks to breathe, knowing they’re under extreme selling pressure. Believe it or not, this is typical of May, seeing the REITs get hit. It happened last year and in 2010. Both times the May sell off represented optimal entry points for the industry. I believe buying them from here until mid June will yield the same results.
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