Wall Street has put together an impressive start to 2019, but Tuesday’s pullback and Wednesday’s choppy trading served as a reminder that many investors are still feeling rather risk averse. This makes traditional defensive buys look smart right now, including REITs.
REITs are companies that own or finance income-producing real estate properties. These types of firms are heavily regulated and have to jump through some hoops to be classified as REITs, but they tend to offer investors a few attractive advantages, which might look even better in today’s environment.
Namely, REITs must pay at least 90% of their taxable income in dividends to shareholders, making them an ideal fit for income-loving investors that love steady cash payouts. This creates a greater sense of stability and could help investors steady the boat during periods of volatility.
There are some drawbacks to REITs, of course. For instance, the presence of mortgage debt makes this a rate sensitive industry, so investors might not love some REIT choices in this rising rate environment.
Even still, this can be offset by targeting REITs that have large amounts of their debt already fixed at a low rate. A prospective investor can also use proven Zacks Rank—which emphasizes earnings estimates and estimate revisions—to find strong REITs.
Typically, the Zacks Rank and its associated Zacks Consensus Estimates use earnings per share metrics, but in the case of REITs, funds from operations (FFO) is the metric of profitability used. The theory is the same, however. Those companies that are seeing improvements to the outlook of their businesses will likely see their share prices rise.
Today’s Bull of the Day, MGM Growth Properties (MGP), is the perfect illustration of this. Here’s how the company’s stock has moved compared to its consensus FFO estimates for 2018, 2019, and 2020 over the past six months:
MGM Growth Properties owns casino facilities. It’s a spin-off of MGM Resorts (MGM), which operates most of the gaming facilities that MGP owns. This includes a number of iconic Las Vegas casinos, including The Mirage, Mandalay Bay, and New York-New York.
MGP is sporting a Zacks Rank #1 (Strong Buy). As we can see, its outlook has improved significantly over the past few months, and the stock has responded well to that. We see that this relationship is pretty apparent for MGP, as its shares eventually pulled back in stretches where its forward-looking outlook was falling and/or plateauing.
MGM Growth’s next earnings report is expected in about three weeks. Currently, consensus estimates are calling for the company to post quarterly FFO growth of 13.5%, bringing full-year growth to around 11%.
But the real trend to spot right now is in MGP’s 2019 FFO estimates. The Zacks Consensus for this period has improved by eight cents over the past 60 days, bringing expected growth to 4% for the year. This positive trend in the buildup to the report is a hint that MGM Growth could be prepared to deliver solid guidance for 2019.
It’s also worth mentioning that MGM Growth is uniquely positioned to succeed in its industry. For one, about 64% of the company’s debt is fixed rate, alleviating some of that aforementioned rate sensitivity. Moreover, MGM Growth said in its most recent investor presentation that its coverage ratio—a measure of its ability to service debt and rental payments—was at 5.9x. This was better than comparable companies such as VICI Properties (VICI) and Gaming and Leisure Properties (GLPI).
MGP also bests these rivals with its “B” grade in the Value category of our Style Scores system. The stock has a P/E of 12.5 and a PEG of 1.5, which represent discounts to the respective industry averages of 14.2 and 2.5.
It’s clear that investors are getting a reasonable price for MGP right now, and that should sweeten a pot that’s already looking quite attractive thanks to rising FFO estimates and a healthy balance sheet.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.
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