Gladstone Commercial Corporation (NASDAQ:GOOD) is a USD$605.92M real estate investment trust (REIT), which is a collective vehicle for investing in real estate that originated in the US and has since been taken on board globally. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the US stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether GOOD is lagging or leading in the industry. Check out our latest analysis for Gladstone Commercial
What’s the catalyst for GOOD’s sector growth?
Concerns surrounding rate increases and treasury yield movements have made investors dubious around investing in REIT stocks. This is because REITs tend to be dependent on debt funding. They are also considered as bond investment alternatives due to their high and stable dividend payments. Over the past year, the industry saw growth of 0.58%, though still underperforming the wider US stock market. GOOD lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its REIT peers. As the company trails the rest of the industry in terms of growth, GOOD may also be a cheaper stock relative to its peers.
Is GOOD and the sector relatively cheap?
REIT companies are typically trading at a PE of 33x, higher than the rest of the US stock market PE of 22x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry returned a similar 8.31% on equities compared to the market’s 9.99%. Since GOOD’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge GOOD’s value is to assume the stock should be relatively in-line with its industry. In terms of returns, GOOD generated 2.55% in the past year, which is 6% below the REIT sector.
What this means for you:
Are you a shareholder? GOOD has been a REIT industry laggard in the past year. If your initial investment thesis is around the growth prospects of GOOD, there are other REIT companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how GOOD fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If GOOD has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its REIT peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at GOOD’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Gladstone Commercial’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other real estate stocks instead? Use our free playform to see my list of over 100 other real estate companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.