Real estate stocks have recently become oversold, presenting an opportunity for investors, according to BMO. Chief investment strategist Brian Belski noted that since the group has been a part of the S & P 500, there have only been a few other instances where the stocks have performed worse relative to the index on a year-over-year basis. Real estate is the only S & P 500 sector in the red this year, currently down 6%. Belski suggested that this abnormal underperformance could be an inflection point historically, indicating a potential turnaround in the coming months.
Market Analysis and Recommendations
BMO identified four other periods of abnormal underperformance in real estate stocks. Following these troughs, real estate investment trusts outperformed the S & P 500 by an average of 17% in the year that followed. Belski believes that interest rate trends have unfairly punished real estate stocks, despite historical evidence showing their ability to outperform in both falling and rising rate environments. Fundamentals such as increasing free cash flow yields and decreasing debt also support the potential for a rebound.
BMO rates certain REITs as outperformers and recommends them for investment. Boston Properties offers a 6.4% dividend yield and has a significant upside potential according to BMO’s price target. Equinix, a data center REIT, has seen a recent stock rally and has about 25% upside potential. Ventas, with a focus on senior housing communities, stands to benefit from the aging population and has a 3.8% dividend yield. Host Hotels & Resorts, specializing in luxury and upper-upscale hotels, offers a 4.4% dividend yield and has about 25% upside potential as well.
Despite recent challenges faced by the real estate sector, there are signs of a potential turnaround on the horizon. With favorable market conditions, supportive fundamentals, and specific investment recommendations from experts at BMO, investors may find value in considering real estate stocks as a part of their investment portfolio. As the market continues to evolve and rebound from the impact of the Covid-19 pandemic, opportunities for growth and income generation in the real estate sector may become increasingly attractive. It is essential for investors to conduct their own research and due diligence before making investment decisions, considering their financial goals and risk tolerance.
Real estate stocks may currently be oversold, but this presents an opportunity for investors who are willing to take a long-term view and capitalize on the potential for growth in this sector. With careful analysis and strategic investment choices, investors can position themselves to benefit from the expected turnaround in real estate stocks in the coming months.