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5 REITs for Hedging Your Portfolio Against Inflated FAANG Stocks

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The year 2020 has seen unprecedented market disruptions thanks to the coronavirus-induced economic downturn across the globe. However, the FAANG stocks, namely Facebook (FB - Free Report) , Amazon (AMZN - Free Report) , Apple (AAPL - Free Report) , Netflix (NFLX - Free Report) and Google parent Alphabet Inc. (GOOGL - Free Report) , have not only shown their resilience but have ultimately been able to put up a brilliant performance this year. The Zacks FAANG composite has climbed 61.5% compared with the S&P 500’s rally of 16.9%.

Well, FAANG stocks have rewarded shareholders for several years now, but these stocks need a special mention now more than ever. This is because the lockdowns and shelter-at-home mandates this year to curb the virus spread have led to a substantial change in consumer behavior and lifestyle, establishing a new normal that includes a massive overnight shift to a work-from-home culture, online learning, telehealth, online entertainment and obviously online purchases.

And FAANG companies happen to be the provider of the essential tools and services that are effectively helping the world to manage and tide over this new normal. This, in turn, has been luring investors and the FAANG stocks are presently trading at a substantial premium to the S&P 500.

In fact, on the basis of the forward 12-month P/E, FAANG stocks are currently trading at 36.26X compared with the S&P 500’s 22.87X. FAANGs have traded as high as 40.80X, as low as 27.88X and at the median of 35.07X, as the chart below shows.

Forward 12-Month P/E

 

However, there is a growing concern that FAANGs have become too pricey and their high valuations might not be sustainable in 2021. In fact, anti-trust issues have crept up and there is rising scrutiny by regulators, which is curtailing their earnings momentum for the upcoming year.

Now, FAANGs represent about 15% of the S&P 500 index. Therefore, if the FAANGs witness a selloff because of high valuation, the index will suffer. To hedge investors’ portfolios against risk like this, REITs seems to be the best option, we will tell you why.

Why REITs Are Good for Hedging?

After experiencing a significant jolt earlier this year due to the pandemic and the consequent concerns about rent collections, REITs seem to be gaining ground. Particularly, with vaccinations ongoing, hopes are high that the pandemic might soon be under control and economic activity will regain pace, translating into higher demand for real estate because for anything under the sun, be it real or virtual, space is required. Moreover, even though the new strain has grabbed some attention, there has so far been no evidence indicating that the vaccines out in the market will be less effective against that.

What’s more is that with the waning of COVID fears, yield-starved investors are expected to flock to the REIT market because that remains the only option to earn income in a yield-less world. In fact, interest rates are down to 0% and estimated to remain low for a prolonged period.

With lower mortgage rates and the positive impact on asset valuations, significantly low 10-year treasuries yield and subdued bond yields, REITs seems to be the best alternatives for income-seeking investors in this yield-less world. Particularly, government regulations mandate REITs to disburse at least 90% of their taxable income in the form of dividends to shareholders each year.

Also, fundamentals quickly recovered after facing a blow at the onset of the pandemic that led to shutdowns. Particularly, with the reopening of the economy, rent collections have been recovering significantly and several REITs expect to collect the missed payments within a year.

Moreover, strong balance sheets and liquidity have made REITs resilient in spite of the pandemic creating chaos to their cash flows temporarily. In fact, REITs entered this crisis with the leverage level hovering at or near record lows and have effectively used the low-rate environment to boost their balance sheet strength, lengthened debt maturities and raised equity capital. This financial strength is likely to continue to play a critical role in the days ahead and help REITs emerge from the pandemic with a triumph.

Therefore, this is the time to boost one’s portfolio with some REITs from a diverse set of asset classes that are not only offering solid dividend yields but also witnessing decent upward estimate revisions, suggesting analysts’ bullish expectations. Also, it is prudent to continue holding a number of industrial, data center, tower and self-storage REITs in your portfolio that offer solid growth prospects and decent dividend yields.

Stocks to Consider

Arbor Realty Trust, Inc. (ABR - Free Report) invests in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets. The company operates in two segments, Structured Business and Agency Business. It has a Zacks Rank #2 (Buy). Moreover, the company has a dividend yield of 9.11%. The Zacks Consensus Estimate for its 2020 and 2021 earnings has risen 11.7% and 9.8%, respectively, in the last 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Gladstone Commercial Corporation (GOOD - Free Report) is focused on the acquisition, ownership and operation of net leased industrial and office properties across the United States. This Zacks Rank #3 (Hold) REIT is poised to benefit from improving market fundamentals. The company focuses on achieving growth on buyouts of high-quality mission-critical assets leased out to tenants with strong credit profiles. It presently has a dividend yield of 8.44%. The Zacks Consensus Estimates for 2020 and 2021 FFO per share moved marginally northward, respectively, over the past month.

Iron Mountain Inc. (IRM - Free Report) provides records & information management services, and data center space & solutions in more than 50 countries. Amid strong demand for interconnection and colocation space, focus on expansion of its data center footprint through joint ventures and developments is likely to diversify its revenue mix. Also, resilient storage volumes are driving organic growth in the storage segment’s recurring revenues. The Zacks Consensus Estimate for 2020 and 2021 FFO per share has risen 3.6% and 1.6%, respectively. Presently, the dividend yield is around 8.38%. The company currently has a Zacks Rank #3.

Four Corners Property Trust (FCPT - Free Report) is involved in the acquisition and leasing of restaurant locations. This REIT maintains an investment-grade financial position and seeks potential acquisition opportunities to enhance its portfolio with real estate catering to restaurant and retail industries. The reopening of the economy is reinstating hopes and things are now looking brighter compared with late March, thanks to the recovery in sales. The quick service category has been minimally affected by COVID-19 in the restaurant industry. Also, the casual dining category has made a healthy rebound with operational efficiency and to-go-ordering. This Zacks Rank 2 company has a dividend yield of 4.12% and witnessed upward estimate revisions for FFO per share over the past month for the current year, indicating analysts’ bullish expectations.  

Innovative Industrial Properties, Inc. (IIPR - Free Report) is focused on the acquisition, ownership and management of specialized industrial properties leased to state-licensed operators for their regulated medical-use cannabis facilities. The legalization of marijuana’s medical use across several states, as well as the permission of recreational consumption in some, has opened up opportunities for the cannabis industry and Innovative Industrial Properties in particular. The Zacks Consensus Estimate for 2020 and 2021 funds from operations (FFO) per share have moved 5.8% and 9.6% northward, respectively, over the past two months. Presently, the dividend yield is 2.48%. The company currently has a Zacks Rank #2.

Zacks Top 10 Stocks for 2021

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