The trade tirade is now a full trade war between the U.S. and China. And how do you know that it’s a war? Well, there’s a new “fight song” with lyrics like: “Trade war! Trade War! Not afraid of the outrageous challenge! Not afraid of the outrageous challenge! A trade war is happening over the Pacific Ocean!”
The song borrows its music from a 1960’s-era theme in a Chinese film titled “Tunnel War” that depicts a fictional conflict with Japan. The song is being hyped up, and is making its way through the excellent WeChat app that’s part of Tencent (OTCMKTS:TCEHY) which I’ve used for years for messaging with my friends in the mainland and beyond via my Blackberry (NYSE:BB).
China was working with advisors who came from the traditional U.S. political sources in negotiating with the current U.S. administration. That has apparently come to an end. Beijing has finally come to the conclusion that the U.S. is being led by a different kind of leadership.
For now, it appears that the rhetoric on both sides is being ratcheted up and that tariffs are not set to go away.
This is very bad news. Consider that Huawei, a privately held company that is one of the leading makers of smartphones and telecom equipment, has been in the crosshairs lately. The U.S. government has been unsuccessfully campaigning to force nations around the globe to ban telecom equipment for their networks.
But this week came news that Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google was instructed to cease doing business in providing support and some access to its open-source Android operating system to Huawei. And similar reports are coming from Intel (NASDAQ:INTC) as well as Qualcomm (NASDAQ:QCOM) and other U.S. tech companies.
The Markets Were Not Fans
The stock market didn’t like this at all — on top of the fears that had already sent the S&P 500 Index down 2.9% from its 2019 high, and the S&P Information Technology Index down 5.4% for the same period.
This price action didn’t sit well at 1600 Pennsylvania Avenue. So, we got a 90-day reprieve similar to last year’s similar deal that allowed U.S. telecom companies to continue to do business with ZTE (OTCMKTS:ZTCOY). So, we’re seeing some buying again in the general market and the tech market.
Don’t get too comfortable with this. I see more volatility on the horizon. The precedent of instructing U.S. companies to cut off vital customers and suppliers — and getting cooperation from those companies — is truly frightening for us as investors. This has me now evaluating how this may play out, as the stock market has plenty of exposure to the technology companies of the globe.
My original call was that China was going to cut a deal as Beijing is fearful of a further economic slowdown which could lead to instability. Instability is the number one thing that it wants to avoid. But the second thing it wants to avoid is looking like it caved into the U.S. It doesn’t want to show that weakness.
Plus President Donald Trump faces his own if the markets slide and the U.S. economy slows as the 2020 election is fully underway.
But you don’t have to wade into all that. I am directing your attention to more of the purest of domestic income and growth plays that are completely separate from the trade war.
U.S. Real Estate
U.S. real estate investment trusts (REITs) are one of the safe havens to own through the trade war. They as a nearly pure Buy American strategy for growth and income. And the market sector continues to perform even during the recent trade tension sell-off.
For the past year, REITs as tracked by the Bloomberg REIT Index have earned a return of 17.9% which is significantly higher than the return for the S&P 500 Index at 7.1%. In addition, during the big sell-off in stocks during the fourth quarter of last year, REITs did drop by 6.1%. However, that was way better than the drop in the S&P 500 Index of 13.5%.
Bloomberg US REIT Index & S&P 500 Index Source Bloomberg
Now, the same question has to be asked of REITs — whether the market is still a value in light of its strong performance?
Well, to start the REITs inside the S&P 500 Index reporting in the first calendar quarter have shown revenue gains averaging 4.4%, with earnings advancing by 6.9%. That’s significantly better than for many of the other segments in the S&P 500 Index sector members reporting so far.
But what about value? On a price-to-book basis REITs are sitting on average at 2.47 times which is well below highs seen early this year and highs over the past thee years. This is important as buying REITs just like for individual properties means not paying too much for the land and buildings.
I have a large and diverse collection of REITs in the model portfolios of my Profitable Investing. And from a value standpoint the average price-to-book value for all of them is at a bargain level of only 1.87 times. This means that our REITs are even better buys right now than even the value-priced general REIT market.
And as noted above, REITs reported higher revenue and earnings for the first quarter. But one of the specific metrics for profitability comes from the rate of return from funds from operations (FFO). This measure the profits that REITs make from just the core business of collecting rents from their tenants.
There are several REITs with significantly higher FFO returns, but on average for my collection, the FFO return is running at 10.3%. That’s quite positive and is supportive for higher dividend payments.
REITs to Recognize
As noted above, I have a collection of REITs in the portfolios of Profitable Investing — all make for great buys. Here are three to recognize for their particular opportunities.
I’ll start of American Campus Communities (NYSE:ACC). This REIT has educational properties focused primarily on dorms for colleges and universities around the nation. This is an attractive market with a captive market for students looking for housing near their classes and activities. The space has been so good that one by one the leading public REITs there has been bought out by non-public investments and private equity.
ACC is the one focused REIT still here. And it is performing with the trailing year return of a much better 25.3%. Revenues are up by 10.6% with a return from funds from operations (FFO) at a nice 9.5%.
It is a value too at only 1.88 times its book of business, including its properties. And the dividend is an attractive 3.9% and has been climbing over the past five years by an average of 5.02%.
Next is WP Carey (NYSE:WPC), which I’ve followed since it came to the public market back in the late 1990s. WP Carey is a large, diversified REIT with assets around the U.S. Its focus is doing sale-lease-back transactions, where owners and occupiers sell their properties to and then lease them back from WPC. It also focuses on triple-net leases, whereby tenants pay insurance, upkeep and taxes instead of WPC.
The return over the past trailing year is a whopping 29.6%, and while revenues have slowed a bit recently to a gain of 4.4%, the FFO return is better at 10.6%. It is also a bargain at only 1.9 times its book value.
And the dividend which keeps rising every quarter by policy is even more attractive at 5.4%.
Last up is Medical Properties Trust (NYSE:MPW). This REIT is focused on health care properties from hospitals to other facilities. And like WP Carey — MPW focuses on net leases which lowers costs and operating risks.
The trailing year return is running at 44.6%. And yet the stock is only at 1.41 times its book value. Revenues are rising at 11.3% and the FFO return is running at 11.6%.
Now I’ve presented some of my favorite stocks that are separate from the trade war risks. For more — look at my Profitable Investing. Click here to learn more: https://profitableinvesting.investorplace.com/
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.
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