We are at the onset of the Q1 earnings season and investors are glued to quarterly releases. One can be lured to stocks that have already impressed with profits. But instead of betting on them, picking stocks that are set to beat can be far more rewarding.
This is because, an earnings beat essentially serves as a catalyst and raises investors’ confidence in the stock. This in turn pushes up its price and fetches more gains from one’s investments. Further, buying an earnings play with less initial investment translates into great returns when the stock eventually trades at a higher price.
Now, this brings us to the REIT industry – we’ll tell you why. Even though in the past few months, Fed rate hike issues and investors’ cautious approach deterred gains from this industry, there has been a recent deceleration in market expectations for a June rate hike amid a fall in consumer prices and a decline in retail sales in March for two consecutive months.
Moreover, the failure of the Trump administration to pass a Republican-led Healthcare bill through the House of Representatives had an adverse impact on investors’ confidence and raised doubts over his other promises. This flared up volatility in the market and brought the mojo back to the REIT space as investors, particularly the income seeking ones, are looking for a safer refuge.
Further, $23.11 billion capital raised in equity and debt in first-quarter 2017 by publicly listed REITs set a 3-year record per the reit.com report. This indicates investors' faith in this sector and their willingness to pour money into it.
However, not all REITs are equally poised to excel. In fact, besides the rate issue, the performance of REIT stocks depends on the individual asset class to which they cater as well as the location of their assets. In this regard, there have been supply issues in a number of asset categories.
Per a study by the commercial real estate services’ firm – CBRE Group Inc. (CBG) – the overall U.S. industrial real estate market remained upbeat in first-quarter 2017, with an essentially unchanged national availability rate despite increased supply. However, the overall office vacancy rate moved up modestly by 10 basis points to 13.0% in Q1 amid increased supply, according to a report from CBRE. Moreover, dwindling mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks. Also, an increasing number of deliveries of new units in a number of key markets and elevated concession activity have raised concerns for some of the residential REIT stocks.
The Zacks Methodology
Amid these, choosing the right stock could be quite difficult unless one knows the proper method. To make the task simple, we rely on the Zacks methodology, which takes into account a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. And research shows that for stocks with this combination of rank and ESP, chances of a positive earnings surprise are as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Here are four REITs that have the right combination of elements to deliver an earnings beat when they release their first-quarter results:
Piedmont Office Realty Trust, Inc. (PDM - Free Report) has a Zacks Rank #2 and an Earnings ESP of +2.33%. The Zacks Consensus Estimate is pegged at 43 cents per share, reflecting an expected increase of 5.7% from a year ago. The company delivered positive earnings surprises in three of the last four quarters, with an average beat of 1.82%. The stock is also trading at a discount to the industry average.
Headquartered in Johns Creek, GA, Piedmont Office Realty is engaged in ownership, managing, developing, and operation of high-quality, Class A office properties situated in select sub-markets of the major U.S. cities.
Piedmont Office Realty is slated to release results on May 2.
EPR Properties (EPR - Free Report) has a Zacks Rank #3 and an Earnings ESP of +0.84%. The Zacks Consensus Estimate for the quarter is $1.19 per share. The company delivered positive surprises in three out of the trailing four quarters, with an average beat of 0.83%. This stock is also trading at a discount to the industry average.
Kansas City, MO-based EPR Properties is a specialty REIT trust that invests in three primary segments: Entertainment, Recreation and Education. Its properties include megaplex theatres, entertainment retail centers, and destination recreational and specialty properties. Its focus on multiple property types helps it to beat retail market blues.
EPR Properties is expected to report results on May 2.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Hospitality Properties Trust (HPT - Free Report) has a Zacks Rank #3 and an Earnings ESP of + 3.30%. The Zacks Consensus Estimate for the quarter is pegged at 91 cents per share. The company delivered positive surprises in three out of the trailing four quarters, with an average beat of 2.17%. The stock is also trading at a discount to the industry average.
Newton, MA-based Hospitality Properties Trust is a lodging and travel center REIT with properties located in 45 states, Puerto Rico and Canada.
Hospitality Properties is likely to report its results on May 9.
Whitestone REIT (WSR - Free Report) carries a Zacks Rank #3 and has an Earnings ESP of +4.00%. The Zacks Consensus Estimate is pegged at 25 cents per share. The company delivered positive surprises in each of the last four quarters, with an average beat of 28.02%. Also, it is trading at a discount to the industry average.
Based in Houston, TX, this is a fully integrated REIT that acquires, owns, manages, develops and redevelops high quality internet-resistant neighborhood, community and lifestyle retail centers. Specifically, its tenants offer daily necessities, required services as well as entertainment to the community.
Whitestone REIT is likely to report its results on Apr 26.
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