(Editor’s Note: This is the second in what will be an ongoing look at how public opinion and news analysis can impact investment strategies).
An Update on Oil
First, here’s a quick update on my Dec. 11 article suggesting that the plunge in oil prices might be both a great short term and long term move for investors. Monday’s sharp drop in oil prices, which spilled over into the entire market, would have us believe that there is no bottom in sight for oil or related stocks. But that’s not true. It’s why I looked at dollar averaging into strong oil related companies.
I based that on both the geopolitical agenda that likely plays a role in this relatively sudden drop in prices and the fact that future contracts relating to U.S.-based shale have been reportedly declining. We still don’t know the long term impact of investing in a solid and diversified petrochemical company such as my example of Conoco Phillips (although at these prices one would guess it potentially lucrative). When my article ran on Dec. 11 Conoco (COP) closed at $63.61. Had one purchased one thousand shares of the stock at that price and simply sold the stock near its closing price on December 31, 2014, they would have picked up a short term gain of over $5400. Of course that short term gain is taxed at ordinary income levels but it probably would pay for plenty of Eddie Murphy’s often quoted “GI Joe’s with the Kung-Fu grip” from the movie “Trading Places.” But consider if one purchased 10,000 shares under that same scenario. That would be closer to $54,000, well worth less than a month’s worth of “ordinary” work.
And for those who dollar average in with this or any similarly strong publicly traded company (Exxon Mobil is the choice of many analysts) there will likely be plenty of additional “news driven dips” that might make these stocks attractive to accumulate for the longer haul, particularly if they can sustain the high quarterly return that a Conoco Phillips provides. As oil prices plummeted Monday one CNBC analyst predicted a return to $70 a barrel oil by the end of this quarter. That might be a bit ambitious. Regardless, if something seems to be too good, it usually is. And oil prices today are simply too good to be true. That bolsters my belief that the next big oil related news cycle will focus on an overreaction by U.S. producers and a rise in prices over time.
Rental Related Stocks Are Still Worth a Look
It’s been no secret that residential rentals have been surging as the nation has struggled to shake off the Great Recession. The banks have been so heavily regulated that qualifying for a mortgage has become a difficult matter for many would-be homeowners, even with the incredibly low interest rates. While the housing market is recovering, it’s not a recovery that
suggests a major shift away from the trend towards rentals. Survey after survey of so-called “Millennials” suggests that this younger and large segment in our economy is leaning towards continued rental for a number of years to come. Among their reasons for opting to rent an apartment or condominium versus owning a house is their belief that future job opportunities may require them to move suddenly and often to new locations. They apparently were a bit traumatized seeing older family members struggle to save their homes over the past six years.
Added to these opinions expressed by Millennials is the new trend in the multifamily community world of providing something more than just the old clubhouse and a pool to attract renters. Some companies are adding amenities ranging from outdoor fire pits and full concierge services all the way to the somewhat excessive creation of a residents-only bowling alley in one development. And just as the youngest in our economy are choosing to rent longer, the Baby Boomer segment is moving to scale down creating a separate but equally attractive rental opportunity.
One cautionary note comes from a survey conducted for Zillow which indicates that Millennials would actually love to own a home but are taking longer to do so because of economic constraints and a lack of high-paying employment opportunities. So with it in mind that real estate investment trusts and related entities geared towards the current binge for renting might see a decline in demand down the road, here’s a look at a trend that could still provide strong returns.
Potential Investments in the Residential Rental/Apartment Arena
I am scared to death of privately-held REITs. They can produce extraordinarily high returns but, as one ‘REIT old hand’ puts it “you have to be willing to not worry about getting your original investment back”— too risky for me. But publicly-traded ones are a different matter.
One of the best known and strongest of such publicly traded companies is Atlanta’s own Post Properties (PPS). The company has performed well. But at present the analysts seem to have a target price for Post that is not too far from its closing price of fifty-nine dollars and change.
Add to the list of larger and pricier publicly traded high end rental companies the name of Apartment Investment and Management Company (AIV). Like Post it has a dividend/yield that is decent and is firmly placed in the upscale rental/apartment market.
While I personally would guess that the price for both stocks will ultimately exceed their current median target level, I would consider them in combination with another play that is far less expensive.
Preferred Apartment Communities (APTS) is near its 52 week high of $9.36 (and was untouched by Monday’s stock market tumble). It is chaired by the original founder of Post, John Williams. As a point of full disclosure, Mr. Williams is a director of Internet News Agency which owns an interest in InsiderAdvantage and our publications. But APTS would make this list regardless
given its recent performance and the trends that support this general concept for continued growth in the industry.
The plus side to a stock like APTS is that it is relatively inexpensive and has a dividend/yield of 8.1%. The negative would be that relative to say, a Post (or AVI), it is thinly traded. Its 52 week low is $7.82 and its high is $9.36. There are fewer analysts who cover Preferred Apartments as do PPS or AVI, but the target price set by those who do cover it is around $10.60.
Just as I believe Post and Apartment Investment (AIV) will ultimately exceed the average target set for their shares, I’m guessing that Preferred will outperform its target as well. I like the idea of that strong quarterly return. And for those who believe the oil plummet will continue to spill over into the rest of the market, these two stocks, just like APTS, enjoyed a slight gain for the day on Monday.
Likely a Good Bet for Several Years or Longer
With the Fed continuing to suggest an increase in interest rates sometime this year and the strongest sale of existing homes in many areas of the nation being the more expensive ones purchased by folks who can easily qualify for a mortgage (if they need one at all), it doesn’t appear that the success being enjoyed by companies involved in the apartment/residential rental area will see their upward trend curbed much in the coming year if not for a good time period to come.
Until the surveys show that the percent of Millennials who want to own a home match up with the percent who say they feel they are ready and able to own a home, companies that own and manage higher end apartments, as well as the strip centers that feed off of them, will probably be an area to consider for investment purposes— that is, if they are publicly traded.
A final note: None of this is investment advice! I’m just one investor searching through news and public opinion. These are my opinions. Seek your own professional when making investments!