Stratus Properties Inc (NASDAQ:STRS), a USD$241.76M 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 fairly unexciting growth rate of 0.59% in the upcoming year . Below, I will examine the sector growth prospects, and also determine whether STRS is a laggard or leader relative to its real estate sector peers. See our latest analysis for STRS
What’s the catalyst for STRS’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. Over the past year, the industry saw negative growth of -6.86%, underperforming the US market growth of 4.49%. STRS 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, STRS may also be a cheaper stock relative to its peers.
Is STRS and the sector relatively cheap?
Real estate companies are typically trading at a PE of 21x, in-line with the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 9.09% on equities compared to the market’s 9.99%. Since STRS’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge STRS’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? STRS has been a real estate industry laggard in the past year. If your initial investment thesis is around the growth prospects of STRS, there are other real estate companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how STRS fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If STRS 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 STRS’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Stratus Properties’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.