For Immediate Release
Chicago, IL – January 24, 2019 – Zacks Equity Research MGM Growth Properties (MGP - Free Report) as the Bull of the Day, Alcoa Corp. (AA - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Arbor Realty Trust (ABR - Free Report) and Chatham Lodging Trust .
Here is a synopsis of all four stocks:
Bull of the Day:
Wall Street has put together an impressive start to 2019, but Tuesday’s pullback and Wednesday’s choppy trading served as a reminder that many investors are still feeling rather risk averse. This makes traditional defensive buys look smart right now, including REITs.
REITs are companies that own or finance income-producing real estate properties. These types of firms are heavily regulated and have to jump through some hoops to be classified as REITs, but they tend to offer investors a few attractive advantages, which might look even better in today’s environment.
Namely, REITs must pay at least 90% of their taxable income in dividends to shareholders, making them an ideal fit for income-loving investors that love steady cash payouts. This creates a greater sense of stability and could help investors steady the boat during periods of volatility.
There are some drawbacks to REITs, of course. For instance, the presence of mortgage debt makes this a rate sensitive industry, so investors might not love some REIT choices in this rising rate environment.
Even still, this can be offset by targeting REITs that have large amounts of their debt already fixed at a low rate. A prospective investor can also use proven Zacks Rank—which emphasizes earnings estimates and estimate revisions—to find strong REITs.
Typically, the Zacks Rank and its associated Zacks Consensus Estimates use earnings per share metrics, but in the case of REITs, funds from operations (FFO) is the metric of profitability used. The theory is the same, however. Those companies that are seeing improvements to the outlook of their businesses will likely see their share prices rise.
Today’s Bull of the Day, MGM Growth Properties, is the perfect illustration of this. Here’s how the company’s stock has moved compared to its consensus FFO estimates for 2018, 2019, and 2020 over the past six months:
MGM Growth Properties owns casino facilities. It’s a spin-off of MGM Resorts, which operates most of the gaming facilities that MGP owns. This includes a number of iconic Las Vegas casinos, including The Mirage, Mandalay Bay, and New York-New York.
MGP is sporting a Zacks Rank #1 (Strong Buy). As we can see, its outlook has improved significantly over the past few months, and the stock has responded well to that. We see that this relationship is pretty apparent for MGP, as its shares eventually pulled back in stretches where its forward-looking outlook was falling and/or plateauing.
MGM Growth’s next earnings report is expected in about three weeks. Currently, consensus estimates are calling for the company to post quarterly FFO growth of 13.5%, bringing full-year growth to around 11%.
But the real trend to spot right now is in MGP’s 2019 FFO estimates. The Zacks Consensus for this period has improved by eight cents over the past 60 days, bringing expected growth to 4% for the year. This positive trend in the buildup to the report is a hint that MGM Growth could be prepared to deliver solid guidance for 2019.
Bear of the Day:
The market is in the middle of quite the interesting earnings season, as Wall Street’s continued recovery from the Q4 selloff feels somewhat contingent on strong results over the next few weeks. Regardless, investors should remember that post-earnings trends often take time to develop, and that means avoiding stocks that did not impress with their reports already.
One such example is Alcoa Corp.. The aluminum producer posted its latest quarterly results last week, and figures for the reported quarter were modest. Adjusted earnings came in at 66 cents per share, which cruised past the Zacks Consensus Estimate. Revenue of $3.35 billion edged out estimates of $3.34 billion.
However, Alcoa’s earnings in the period were down significantly from the $1.04 witnessed in the year-ago period. This represents a year-over-year decline of 37% and marks the second consecutive quarter of EPS contraction for Alcoa. The company faced pressure from a drop in aluminum prices and a decrease in the price of energy sales in Brazil.
The issue with these market challenges is that they are coming at a time when other costs are rising. Alcoa reported a year-over-year COGS increase of $230 million, outpacing its gain of $170 million in revenue. COGS as a percentage of revenue increased to 75.7% from 72.5% last year.
Concerns with Alcoa also relate to fears that the global economy is moving past peak growth. Alcoa itself said that it expects the world’s alumina deficit of 2018 to turn into a surplus by the end of 2019. This suggests a slowdown in demand, which signals sluggishness in key economic indicators such as manufacturing.
Alcoa’s report and the sentiment that emerged from it immediately sparked a series of negative earnings estimate revisions for the company. In just the past week, three analysts have adjusted their 2019 EPS estimates to the downside, bringing the Zacks Consensus Estimate down to $1.93 from $2.67.
This is a trend that was already starting to develop prior to last week’s report. In fact, Alcoa’s 2019 estimates have seen seven negative revisions in the past 60 days, and the consensus has fallen from a peak of $4.06 to where it stands today. That represents a roughly 52% drop in Alcoa’s earnings consensus for the year. Earnings for 2019 are now expected to decline 46%.
The company’s earnings consensus for 2020 has not fared well either. In the past 60 days, Alcoa has witnessed five negative revisions to its 2020 EPS estimates, dragging down the Zacks Consensus from $4.19 to $2.72 in that time. This move is a decline of 35% in the consensus.
Alcoa shares are down about 34% in the past six months, as investors were able to see what falling aluminum prices and slowing global growth could do to the company’s earnings outlook well ahead of time.
Even still, the value case for Alcoa is not apparent. On a forward 12-month basis, the stock is trading at 12.2x earnings. That’s near the highest forward earnings multiple it has seen in the past six months, reflecting the severity of the drop in its 2019 consensus.
3 Great REITs to Buy Right Now
The stock market’s strong run over the past few years brought attention to high-flying growth stocks, usually from the technology sector, that were consistently outpacing the market. However, fresh volatility within the last few months has shifted some focus back towards other investment strategies, and now it might be time for investors to check out things like real estate investment trusts, or REITs.
REITs are companies that own, operate, or finance real estate properties that produce income, such as apartment complexes or retail locations. These companies are heavily regulated and must meet a number of qualifications to be classified as a REIT, but they do offer investors a few distinct advantages.
First of all, real estate can be a very profitable investment sector when certain economic conditions are present. What’s more, REITs must pay at least 90% of their taxable income in dividends to shareholders, so they are a great option for income investors looking for steady payouts.
The presence of mortgage debt makes this a rate sensitive industry, so investors might not love some REIT choices in this rising rate environment. But many companies offset this through strong funds from operations (FFO) growth—or they stick out from the pack with large amounts of their debt already fixed at a low rate.
Luckily for Zacks readers, the proven Zacks Rank—which emphasizes earnings estimates and estimate revisions—works with REITs just as it would with any other company. We prefer to use FFO as the metric of profitability here, but the trends work the same otherwise. The strongest REITs are going to be those with improving outlooks and great Zacks Ranks.
With that said, check out the REITs that our model says are impressive options right now:
1. Arbor Realty Trust
Arbor Realty is a specialized real estate finance company investing in real estate-related bridge and mezzanine loans, preferred equity, mortgage-related securities and other real estate-related assets. The company is a nice small-cap option for exposure to the U.S. mortgage market.
ABR sports a Zacks Rank #2 (Buy). Analyst estimate trends have been positive, and the Zacks Consensus Estimate for the company’s 2019 FFO has gained five cents over the past 90 days. ABR also offers a 9.7% yield based on current prices. Finally, the stock has a beta of just 0.4, making it a low volatility option.
2. MGM Growth Properties LLC
MGM Growth owns 13 gaming properties, most of which are operated by casino giant MGM. This portfolio includes a number of iconic Las Vegas casinos, including The Mirage, Mandalay Bay, and New York-New York. The business is primarily structured through NNN leases, which means it is more protected from one-time or unexpected costs.
MGM has a Zacks Rank #1 (Strong Buy) and offers a dividend yield of 6.1%. FFO estimates for 2019 are moving higher, and now the company is expected to witness even more growth on top of 2018’s expected 11% expansion. On a long-term basis, analysts expect MGP to record annualized FFO growth of 8.5%. Plus, the company has consistently raised its dividend every year and generates about $4.41 in cash per share.
3. Chatham Lodging Trust
Chatham Lodging is a self-advised hotel REIT that focuses on upscale extended-stay and select-service hotels. The company’s portfolio includes notable brands such as Courtyard, Hampton, Hilton Garden Inn, and many more. These facilities are primarily near large metropolitan markets in the U.S., so Chatham is definitely in some prime lodging real estate.
CLD holds a #1 (Strong Buy) rating. Its consensus estimates for FFO in the current and next quarter, as well as the current and next full fiscal years, are all higher over the last 60 days. CLD also trades with a P/E of just 9.7, which is a steep discount to its industry’s average of 14.2. The stock presents a dividend yield of 6.8%, and the company has consistently delivered this payout for years.
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market's +126.3%, reaching +181.9%.
This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.
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