Optibase Ltd (NASDAQ:OBAS), a USD$41.97M small-cap, operates in the real estate industry which displays attractive investment characteristics relative to other sectors, especially over time. Real estate analysts are forecasting for the entire industry, a relatively muted growth of 5.15% in the upcoming year , and an enormous growth of 62.59% over the next couple of years. This rate is larger than the growth rate of the US stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether OBAS is lagging or leading in the industry. See our latest analysis for OBAS
What’s the catalyst for OBAS’s sector growth?
Not every category of real estate is likely to be impacted the same by macroeconomic factors such as interest rate hikes, and not all locations are primed to grow. So, investors must remain cautiously optimistic and analyse the fundamentals of the underlying industry. In the past year, the industry delivered negative growth of -0.63%, underperforming the US market growth of 10.30%. OBAS 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 real estate peers. As the company trails the rest of the industry in terms of growth, OBAS may also be a cheaper stock relative to its peers.
Is OBAS and the sector relatively cheap?
The real estate sector’s PE is currently hovering around 29x, above the broader 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 lower 7.75% compared to the market’s 10.06%, which may be indicative of past headwinds. Since OBAS’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge OBAS’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? OBAS has been a real estate industry laggard in the past year. If your initial investment thesis is around the growth prospects of OBAS, there are other real estate companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how OBAS fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If OBAS 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 real estate 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 OBAS’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Optibase’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.