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5 REITs to Buy for Gains From a Near-Term Rate Cut

Swarup Gupta

U.S. stocks surged on Jun 4 after comments from the Fed Chair led investors to believe that a rate cut is imminent. Gains continued on Jun 5 after other senior Fed officials also indicated that a decline in rates may be necessary soon. Overall, investors seem fairly confident of a rate cut. 

Such expectations are being bolstered by the continued decline in bond yields. Meanwhile, investors are receiving mixed economic signals, keeping alive concerns about the state of the economy. A quick solution to America’s numerous trade disputes also seems highly unlikely.

All these factors indicate that a rate cut could happen sooner rather than later. While markets will move higher during this period, volatility is also likely to plague investors. REITS would be great picks at this time, both because of their rate-sensitive nature and ability to deliver consistent, high-income streams.

Powell, Key Fed Officials Hint at Rate Cut

On Jun 4, Fed Chair Jerome Powell said the central bank was closely examining how ongoing trade disputes are impacting the economic outlook for the United States. Powell said that the Federal Reserve would “act as appropriate” in order to support the current economic expansion.

Powell’s comments were largely in line with those made by St. Louis Fed Chief James Bullard on Jun 3. Per Bulllard, low inflation and ongoing trade conflicts, may soon lead the central bank to announce a rate cut. Bullard thinks that it would be tougher to resolve current trade disputes than was earlier believed.

Fed Vice Chair Richard Clarida adopted a more cautious approach while speaking to CNBC on Jun 4. Clarida thinks the American economy is in a “very good place.” But he was quick to point out that changes in economic conditions would lead the Fed to move away from its current policy stance.

REITs to Benefit From a Rate Cut

A major feature of REITs is that they are a rate-sensitive class of securities. It comes as no surprise that they flourish in a low-rate environment. And the latest signals from the Fed indicate that a near-term rate cut is likely if the domestic economy continues to show signs of weakness.

Going by data from the CME FedWatch tool, traders think that there is a 22.5% chance of a rate cut after the central banks’ Jun 19 meeting. The odds of a decline in rates after the Fed’s Jul 31 meeting are even higher, with traders putting at 72.1%.

On the other hand, this class of securities could benefit even if economic growth remains robust. Strong economic growth can fuel gains for REITs even in a rising-rate environment, as demonstrated by data from the National Association of Real Estate Investment Trusts. This is because robust economic conditions boost the industry’s earnings and share prices.

Our Choices

Leading figures from America’s central bank, including the Fed Chair, have recently indicated that a rate cut could be on the anvil. The strongest of these voices is Bullard, who has hinted that low inflation and the detrimental impact of trade conflicts could lead the Fed to announce a rate cut.

REITs are likely to benefit under these circumstances, given their rate-sensitive nature. This is why it makes good sense to add them to your portfolio. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

The GEO Group, Inc. GEO specializes in the design, development, financing and operation of correctional, detention and community reentry facilities.

The GEO Group carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company’s expected earnings growth for the current year is 8.3%. The Zacks Consensus Estimate for the current year has improved by 14.1% over the last 30 days. The stock has a dividend yield of 8.8%.

Arbor Realty Trust, Inc. ABR invests in real estate-related bridge and mezzanine loans, preferred equity, mortgage-related securities and other real estate-related assets.

Arbor Realty Trust has a VGM Score of B. The company’s expected earnings growth for the current year is 1.2%. The Zacks Consensus Estimate for the current year has improved by 9.5% over the last 30 days. The stock has a dividend yield of 8.9%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Clipper Realty Inc. CLPR specializes in acquiring, owning, repositioning, operating, and managing commercial and multifamily residential properties in the New York metropolitan area.

Clipper Realty has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.3% over the last 30 days. The stock has a dividend yield of 3%.

Host Hotels & Resorts HST is one of the leading lodging REITs engaged in the ownership, acquisition and redevelopment of luxury and upper-upscale hotels in the United States and abroad.

Host Hotels & Resorts carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 2.5%. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days. The stock has a dividend yield of 4.4%.

Outfront Media Inc. OUT is a leading provider of out-of-home advertising space in key markets throughout the United States and Canada.

Outfront Media carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 7.2%. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days. The stock has a dividend yield of 5.8%.

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Arbor Realty Trust (ABR) : Free Stock Analysis Report
 
Host Hotels & Resorts, Inc. (HST) : Free Stock Analysis Report
 
OUTFRONT Media Inc. (OUT) : Free Stock Analysis Report
 
Geo Group Inc (The) (GEO) : Free Stock Analysis Report
 
Clipper Realty Inc. (CLPR) : Free Stock Analysis Report
 
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