Best stock investments – February Idea of the Month



Best stock investments

As we enter mid-February and a slow week in Gumshoeland next week, I’ve got a few personal buys of stocks that we’ve mentioned before, and a new “Idea of the Month” candidate that’s maybe not quite ready to buy just yet (we’ll be closed on Monday, and will probably publish less than usual during the balance of the week as I take my leave to romp with the little Gumshoes during their vacation break — unless something shocking happens, there likely will not be a Friday File next week).

First I’ll share a couple updates and quick reactions to recent earnings, then we’ll morph into talking about the buys I made today, and we’ll close out with our “Idea of the Month.”  I’m all over the map with my blatheration this time around, but most of my thoughts right now are revolving around stable dividend payers and compounding yields, which is my “happy place” when the market gets tumultuous. Off we go!

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Criteo (CRTO) had another blowout quarter. Criteo is a volatile stock because it’s priced for rapid growth… but so far, it’s delivering that growth and continuing to add customers, and the valuation has become much more reasonable thanks to 100% earnings growth in 2015 and a dip in the share price. Now CRTO trades at about 30X last year’s free cash flow and is still small and growing rapidly, with earnings growth of 40% plus expected this year.  I’m still holding my remaining position, and with a current PEG ratio of about 1.25 I consider it a buy at this price (half of my personal position was sold last month as part of my stop loss experiment).

The risks are legion, including competition — Google and Facebook, most prominently, since those are their biggest vendors of traffic and their biggest competitors, but also other ad-tech startups. CRTO is in much better shape financially than most of the other smallish competitors, and is almost unique among the small adtech companies in being profitable, let alone in posting great profit growth. I continue to be unworried about the rise of “ad blocking” software, which has been part of the “story” that has caused some suffering in these shares over the past year (if ad blocking does worry you, choose Facebook rather than Criteo or Google — browser-based ad blocking doesn’t work on Facebook’s mobile app, which is the heart of their business). Facebook and Google are obviously far stronger, and I own much larger positions of both (Facebook is my largest single stock holding), but Criteo offers potential for more aggressive growth — or a possible takeover, if the shares remain in this relatively low range.

Ligand (LGND) had another quarter of “more of the same” — analysts have gotten pretty close to pegging LGND’s results much of the time, and Ligand management is pretty good at massaging earnings forecasts so that they can meet analyst expectations. I don’t see any reason for that to change, though it’s worth noting that this is their big quarter — if there are to be big dips in LGND they might come in the middle part of the year, since the first and second quarters are generally weaker (their royalties are based on sales and reset each calendar year, so until sales of Promacta and Kyprolis hit milestones during the year ($100 million, $500 million, etc.) the royalty rate is lower).


And many of the healthcare REITs reported this week and were shellacked — including Medical Properties Trust (MPW), which I own and have written about for you many times. For most of that group, and for MPW specifically, I think that’s misguided selling out of fear — there were unquestionably bad results at HCP (HCP), the leader in the space, that were primarily due to problems with their ManorCare partner in skilled nursing facilities, but that has little to no impact on other segments of health care real estate (medical office buildings, senior living facilities, hospitals, etc.) and shouldn’t (though this is far less certain) have as big an impact on other skilled nursing-focused REITs as it did on HCP, which got itself far too levered to a single partner and was relied on (and perhaps overvalued) as a stalwart because of their status as the only “dividend aristocrat” in the space (anything over 25 years gets you “aristocrat” status, and HCP is one of only three REITs on that list thanks to 30 years of annual dividend increases).

In terms of MPW’s actual results, all seemed fine to me. Their guidance is a little lower than the Street expected, but that’s probably partly because of their planned balance sheet improvements and gives them plenty of room to maintain and grow the dividend in the future (it’s approaching a 9% yield now). I mentioned this in a comment to last week’s Friday File, but here’s a little more flesh on that:

MPW’s management expectation of getting $500 million in permanent financing (a bond offering, likely by next month) and selling ~$500 million of assets in the first half of the year to pay off their $1.1 billion revolving debt (due 2018) seems reasonable to me, and they say they have unsolicited offers for some of their assets that they could sell (they own equity in some operators in addition to real estate).

That gives them the adjusted FFO they’re forecasting of $1.29-1.32 per share, which easily covers the 88 cent dividend and gives room to raise it if they wish — though they indicated on the call that there’s no immediate plan to raise the dividend. I would suspect that a dividend hike this year, if it comes, would be in the second half of the year after the balance sheet has been cleaned up to cover their acquisition flurry of 2015, and after their debt coverage ratios have improved a bit. A dividend hike right now would probably actually be taken negatively by the market, given that MPW is at the top of the debt coverage range that they would like to have.

The market wasn’t particularly delighted with MPW’s results, as you probably noticed. This is not a market where “things are about where you thought” is going to move a stock up. But it seems fine to me.

That hasn’t kept the stock from going down further, but I’m sticking to my guns on this one — particularly because the operators of MPW’s facilities are not in trouble as far as I can tell, they have ample coverage to pay their lease obligations even though, for many of them, we’re in a period of flat performance due, in part, to changing reimbursement rates.

I think the market is being irrational with some of the health care REITs and driving them down for no particular reason, and that the yields are getting too compelling to ignore for very long — hospitals and doctor’s office are not going to be going bankrupt right and left and failing to pay their landlords, health care economics have changed with the Affordable Care Act and other regulation, and with changes or challenges to some Medicare and Medicaid reimbursement, particularly for long term care and skilled nursing facilities, but the longer-term impact of a growing market and higher demand should keep health care facilities in business. As long as they’re in business and paying their rent, and interest rates aren’t spiking upward (if anything, long-term rate expectations are now falling again, not rising), then health care REITs in general should be a good low-volatility, high dividend, long-term investment for those who can sit through the volatility.

Unless I’m wrong, of course. Which happens.

But while I’d like to add to my investments in this sector, I don’t want to overdo it with exposure to any one company and I already have a large allocation to MPW and a small one to Physicians Realty (DOC) — so I’m diversifying in health care REITs by adding two much more mature, much more proven dividend growers (MPW is not a dividend grower to count on just yet, though it has a high yield, and DOC is so young that they really can’t afford to raise the dividend yet).

I’m increasing my position in DOC slightly, and adding positions in two more REITs that provide some exposure to other healthcare segments — Ventas (VTR), which after spinning off much of its skilled nursing portfolio is largely in senior living communities and medical office buildings (they still have some skilled nursing and other stuff, too), and Omega Healthcare Advisors (OHI), which I wrote about a little bit last week and which is cheap now, but clearly risky.

OHI is the biggest skilled nursing “pure play” REIT, they have grown their dividend every quarter (not just every year), and their largest single-customer concentration is well below 10% (HCP’s problem in skilled nursing, in large part, was the massive impact that ManorCare, a single partner, has on their income statement). Other operators in skilled nursing are in some financial distress as well, including Genesis, which is OHI’s biggest tenant (though only 7% of sales) — but absent real crises, it’s not rent that’s driving them out of business and I suspect that, given the huge need, most of these operators will find a way to stay in business and manage through these reimbursement challenges (which are not new this week, though perhaps some investors felt they were when they heard about HCP’s quarter). Rent is a real cost, and there may be writedowns at some point with some tenants, but at Genesis, for example, the rent they have to pay to OHI is only about 5% of sales.

Both OHI and VTR reported this week, and in both cases the numbers were strong and the companies evinced little worry about the fundamental performance of their partners and tenants (it’s worth reading the earnings call transcripts to get a better idea of management’s sentiment — OHI is here, VTR is here). Ventas currently trades at about a 6% dividend yield (they’ve raised the dividend annually for 16 years, though there was a seven-quarter lull during the financial crisis), Omega Healthcare trades at a yield of 8.3% based on my expectations about future dividends (that assumes they’ll continue to raise the dividend by one penny each quarter, as they’ve done, mindfully, for several years).

I’m not betting the college fund on these, but will use them to opportunistically diversify within the healthcare REIT segment at what are historically high yields (and high relative yields) because, I think, of too much investor fear. So there are some more small nibbles for you as I keep taking small, cautious bites while the market falls. As far as position sizing goes, MPW is by far the largest in my portfolio and I think it remains the most mispriced — that’s about half of my healthcare REIT allocation, the other three positions (DOC, VTR, OHI) are of roughly equal size to make up the other half. I won’t be adding to MPW anytime soon, it’s possible I’ll add more to the others but that’s probably unlikely since this small sub-segment already has an outsized weighting in my portfolio.

With the average REIT now hitting a yield of better than 4%, even some “regular” REITs are looking fairly appealing for a low-rate slow-growth environment. The Vanguard REIT index ETF (VNQ), which follows the MSCI REIT index, is at 4.4%, which is higher than the yield has been since the financial crisis and, if you ignore the crazy year during which everything bottomed from late 2008 to early 2009, higher than it’s been in more than a decade — and in relative terms, the yield is even more striking — if you compare the yield on VNQ (or, if you want to go back a bit further with the iShares REIT ETF IYR) to the yield on the 10-year treasury note, the spread is over 250 basis points (2.5 percentage points), a level we’ve only seen twice in 15 years — once for about four months in late 2002, and again for about nine months during the financial crisis.

This is that that looks like over 15 years:
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And this is what the “action” looks like over a much shorter period, just the past five years:
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That spread has been rising sharply over the past several months, and I don’t know if it’s done moving — which is to say, I don’t know if the REITs are done falling in price. We could certainly see a crash or a real interest rate disruption, and it’s obviously wise to be prepared for any sector to fall, but I’m less worried about that now when it comes to REITs than I have been for a while. The current yield makes the ETF (either VNQ or IYR) seem more appealing to me for those who simply want a nice sector allocation, but I continue to think that a depressed sector might create opportunity in some of the “oddball” segments of that sector that might get further mispriced or misunderstood. I’d argue that’s happening now with healthcare REITs, but what else?

CoreSite (COR) was getting close to having that kind of appeal again, with its incredible dividend growth rate and a price dropping to the mid-$50s, but then they released another great quarter and it bounced back to $60 this week. So I went sniffing around to see if there are any other REITs that have high dividend growth numbers and reasonable debt levels.

The ones that fit the criteria are indeed a little bit unusual by REIT standards. I did a screen for REITs that have a financial debt to equity ratio of 0.5 or less, pay a non-trivial dividend of at least 2.5%, and have grown their dividend by at least 20% over the past year. After filtering out some mistakes in the screen due to timing, you get a couple self-storage REITs, Extra Space (EXR) and Sovran (SSS), a couple data center REITs, CoreSite (COR, no surprise) and QTS (QTS), one mortgage REIT, Cherry Hill Mortgage (CHMI), and a bunch of hotel property REITs — Diamondrock Hospitality (DHR), Pebblebrook Hotel (PBH), Lasalle Hotel (LHO), Host Hotels & Resorts (HST), and Sunstone Hotel (SHO). Almost all those hotel REITs are down by 50% over the past year after peaking in early 2015 (the exceptions are HST, down slightly less than that much, and SHO, which is only down 30%). That screening is imperfect (a few slipped through that currently have higher debt ratios, for some reason), but it’s an interesting list.

Is there anything in that list that inspires enough interest to actually pursue them for an investment? Well, the self-storage segment of the REIT market continues to look pretty interesting, as it was when I wrote about it last month following a Cabot teaser pitch for a different company in that space, but I continue to be a little bit skeptical of the huge increases those stocks have made — maybe I’m just being too conservative because I see this as a segment with relatively low brand value and high competition and low barriers to entry, the fact is that they’ve certainly done well so far, and Americans are continuing to be burdened with more and more stuff.

And Sunstone Hotel jumps out a little bit just because the yield is so high, at well over 10%, though that’s almost all paid in special “catch up” dividends at the end of each year (so current investors might receive something quite different in 11 months). That one is quite small and owns full-service hotels in some real core urban areas, which is attractive. This is a recovery story, to a large degree — they stopped paying dividends after the 2008 collapse and restarted at a low level (just 20 cents/year is the base dividend), but performance was good in 2015 and forced them to pay out that large dividend of $1.26 at the end of December (it was only 0.36 at the end of 2014, so that’s not a consistent number we can necessarily count on — not after four years without dividends going into 2013).

The hotel space is pretty new to me and there’s obviously something bigger going on in that segment that I might not understand, with just about all of the hotel REITs down so sharply, but I do like Sunstone’s ownership of high-end downtown business-class hotels in major markets (mostly managed by Marriott and the like, Sunstone is just the property owner). I’m going to keep looking into this one, but I don’t want “special dividends” right at the moment, I want something with stable growth that has been marked down by the market.

On that front, the one that really catches my eye, partly because I completely missed out on the fantastic (and, in retrospect, “no brainer”) run of American Tower (AMT) many years ago, is AMT’s big competitor Crown Castle (CCI), which followed AMT in converting to a REIT a couple years ago. So I thought I’d look into that one for you a little bit as our “Idea of the Month” this time around, despite the fact (spoiler alert) that I’m not quite ready to say that it’s at a good price for buying just yet.

That relatively new REIT status is why CCI’s dividend growth shows up as being so fantastic: Because it didn’t really pay a dividend before, and they’ve just eased into a dividend over the past couple years. Still, since starting their dividend at 35 cents/quarter a couple years ago they bumped it up first to 82 cents, a huge surge, and then, last quarter, to 88.5 cents. That’s very rapid growth, and a current yield of 4.3%, but it’s probably true that the 7.5% dividend growth they posted most recently is closer to what we should expect going forward than was the previous, huge 134% dividend increase.

Which is a shame, and a disappointment compared with CoreSite’s years of 20-25%+ dividend increases, but not so bad — at that rate, today’s $3.54 annual dividend becomes a $5 annual dividend in five years… and it could grow a bit faster if the business does well, adjusted funds from operations this year at CCI are expected (per the 4Q earnings presentation) to grow by 6-10%, if they grow FFO per share at 10% they can likely grow the dividend a little more aggressively if they wish.

This brings us to the kind of calculus that dividend investors love — how does that work out over five years, assuming that the business stays pretty stable?

Well, if we assume that CCI stays at about $80 a share over the next five years, which I think is a bit pessimistic but a conservative starting point, then the current dividend at $3.54 means your investment of $8,000 in 100 shares nets you a $354 payment the first year, increasing by 7.5% a year (we’re guessing on the growth, but that was the last hike).

If you reinvest that dividend instead of spending it on Jujubees and soda pop, then after five years your total shareholding has gone up from 100 shares to about 120 shares without you investing anything additional. Those 120 shares each then have a $5 annual dividend, for a net payment of $600 a year — which is a 7.5% dividend on original cost from a stock that you initially bought for its 4% dividend.

Keep that up for a while, if the company continues to do well and pay a steadily growing dividend, and it builds up nicely… particularly if you have a tax-sheltered account (ideally a Roth account so you never have to pay taxes, but even a regular IRA or 401k, which tend to be excellent places to hold REIT shares). If you write in a little optimism, the company grows and sees things improve and the shares also go up 4% a year, then you end up with your $8,000 investment being worth a little over $11,500 and spitting out another $600 in that fifth year and continuing to grow after that (in case you’re counting, that’s a 31% total return over five years — which is not teaser-worthy, but would probably make a relatively conservative portfolio look a little better). That’s not going to get a retirement villa in St. Barts, but it’s how reasonable people can build some nice wealth, with relative safety and patience, in steady dividend-paying companies.

Of course, buying the right ones is important to make sure you’re not buying into something that doesn’t yield enough, or can’t grow, or requires too much new equity or debt to grow… if you buy for the 4% yield and things turn ugly, interest rates shoot up, everyone panics about REITs, and the stock drops from $80 to $60 because investors are demanding 6% yields from REITs like CCI, then it can take a long time to build that lost equity back up. And unlike traditional shopping centers or office buildings or homes, we don’t have a lot of historical understanding of what the real estate value of a cell phone tower might be in times of inflation (real estate in general does well at holding value in inflation, so REITs have generally performed well even in rising rate environments… but that doesn’t necessarily mean all REITs are inflation-protected). REITs recovered from the 2008 crash pretty quickly, but that doesn’t mean they’ll recover as quickly next time if they turn down sharply because of rapid interest rate increases.

And, of course, you have to monitor them to make sure you’re not wrong about the business, and are buying them when prices are relatively attractive, and, perhaps most importantly, you have to try to ignore the slings and arrows of the daily market fluctuations if you’re confident that management is doing the right things and the marketplace has not fundamentally changed (much like you wouldn’t check the assessed value of rental real estate you might own each month — you’re not going to sell it if the assessed value pops by 10% or drops in value by 10%, you’re going to keep building equity value and collecting rents). But really, as with so many things, buying at the right price is a key, and there’s no way to be certain of that — much depends on interest rates, particularly for investments like REITs that trade primarily based on the income they pay out, and I’m pretty sure interest rates will stay low for a long time. But “pretty sure” is not the same as “bet it all.”

If you want to do a similar compounding calculus with Omega Healthcare, for example, which is in a highly-regulated but probably riskier business, you get an idea of how much more dramatic it can be when the initial yield is much higher. Let’s say we spend $2,800 to buy 100 shares. The dividend on that currently annualizes to $2.28 per year, but management has indicated they’d like to keep boosting the dividend by a penny per quarter, as they’ve done for several years. If they do that, you end up with dividends over the next five years that add up to $12.70 per share, you reinvest them like a wise compounder and you’ll add almost 50 more shares through dividend reinvestment, and if you do reinvest and compound, then the annual yield at the end of that five years is approaching 17% on your original cost (the actual yield per share is almost 10% on cost, but you’ve increased your share count by almost 50% by reinvesting your dividends). Even if the stock is still at $28 in five years, you’re approaching a portfolio value of $4,000, a 42% gain on your original investment, and earnings $600 a year on that position. Assuming all works out well, of course. With REITs, I’m of the opinion that it’s wisest to not assume a lot of capital gains — assume that the dividend will be the only real return you get, and think about whether that will be enough.

This same dividend compounding power, which is the strongest force we have working for us as individual investors, can work with any stock that pays a solid amount of income, and you’ll often find that growth is far better in non-REITs… but with well-managed REITs you can be reasonably sure, at least, that management won’t fritter away all the cash on non-accretive acquisitions or on wasteful corporate overhead or unprofitable capital investments or on buying back stock at high prices as so many companies do, because they are judged almost entirely by the amount of cash they’re able to pay out to shareholders, and they’re not allowed to hold on to their profits — the tax man says they have to send them to shareholders, thank you very much.

I think that we’re likely to be in an environment where income investments are prized for both geopolitical and demographic reasons — government bond yields and “safe” income yields from CDs and the like are not likely to rise to attractive levels because of the continuing global flight to attempted stimulus and the weakness of China’s growth engine right now, but we have millions of relatively affluent Americans retiring over the next decade who need income yields of 3, 4, 6% from their portfolios to make their retirement budgets balance. I think that’s likely to drive interest in REITs that have growing or stable yields of 4%+, relatively stable or predictable businesses that can withstand recessions, and the potential for even low growth in equity value over time.

But I digress… back to CCI. Is Crown Castle one of those stable yielders that we can count on? Well, they’re pretty new as a REIT, but the yield, at least, is now starting to fit.

Crown Castle is an owner of cell phone towers — like American Tower, they own a huge portfolio of towers and rights to tower-like locations (rooftops, etc.) and lease antenna space to communications companies, mostly the four big mobile telecom companies in the US (Verizon, AT&T, Sprint, T-Mobile). The phenomenal growth story in CCI and AMT came over the past decade because the demand was huge — telecom companies wanted to improve and expand their networks, and they also wanted to upgrade their networks to 3G and then LTE, requiring more equipment and more space on those towers.

The advantage a cell tower REIT has over, say, an office building REIT, is that additional leases don’t require significant additional capital investment — you don’t have to build a new tower each time you add a new customer or each time an existing customer needs to add more antennas. As you’ve probably noticed from the towers in your neighborhood, they can add a lot of new antennas to existing towers before the capacity is maxed out, and the tower costs roughly the same amount to build and operate with five antennas as it does with 30 antennas, each new lease of more space on existing towers should come at a higher profit margin.

The fear, for the most part, is that consolidation of the mobile telecom players means they might lose some customers — if, for example, Sprint and T-mobile had been able to merge last year as they wanted to, the tower companies would probably have suffered some as they wouldn’t need both companies’ network equipment on each tower. And there’s fear of technological obsolescence, that new technologies and next-generation mobile telecom devices and antennae and relays will not rely on towers. Or maybe not rely as much on towers, with less premium paid for “prime” tower locations. Or, of course, maybe rely more on towers for more, smaller antennas. We don’t really know what the impact of 5G will be on the tower owners, but it seems to me a reasonable bet (though reasonable people disagree strongly) that it will be similar to the migration from 2G to 3G, and from 3G to 4G — so far, each new advancement has led to more tower demand and more equipment on the towers, which could, very logically, lead to better lease rates for tower owners.

But that requires some prescience and some patience, there will not be any meaningful growth from 5G for at least several years, most people seem to believe that we’re still four or five years away from any real adoption of the next generation that will follow 4G/LTE in the US. My expectation is that continued growth in demand for mobile bandwidth is likely to drive demand for better service from Verizon, AT&T et al, which will drive demand for more cell sites and more equipment on each tower. That puts AMT and CCI in a pretty good spot as business-to-business utilities, I think, though with a frisson of “obsolescence risk.”

But as I said, I looked at AMT several times, failed to see the wisdom of the business model, and pooh-poohed the idea of a REIT yielding only one or two percent — I thought investors wouldn’t go for that. I was wrong, at least until this past year or so when the tower stocks finally stopped going up. So why Crown Castle, the relative upstart, instead of American Tower, which blazed the “tower REIT” path?

Well, the numbers are just better. The yield is higher, and Crown Castle carries a lot less debt than American Tower. Both are borrowing at similar interest rates, in the 4% neighborhood for ten years right now, and they can afford the debt — but AMT has almost twice as large a debt burden, relative to the equity. Crown Castle’s total debt load is about the same as American Tower’s when you look at it on an EBITDA metric, both companies have total debt that’s about 6X EBITDA (right about where Medical Properties Trust is, coincidentally enough, so you can see how similar metrics are perceived very differently in different segments), but that might mean Crown Castle has been a bit less efficient… so perhaps, in what should be an essentially identical business, that they should have room for improvement as they continue to grow. And CCI is a bit smaller, and potentially creating some value just recently by divesting their Australian towers so they can continue to focus on the US (which is clearly a stronger market right now, though that won’t necessarily always be the case)

This is not an easy buy at the moment, but it’s getting there if you assume that cell towers will continue to have value and be in demand as mobile technology evolves into the next generation. The company is almost in stasis right now, they pay out most of their free cash flow as dividends and invest the rest into capital (new towers, improving existing towers), and also borrow some to help finance that capital investment. The 4% yield is not the only value being built or generated by the company, but with the current numbers it’s pretty close… I think CCI is a much better deal than AMT right now, and that AMT is getting a lot of credit for past success that was built, in many ways, by adding arguably too much debt to their balance sheet, but I also don’t see dramatic dividend increases for CCI in the year to come (as of now, they’re paying out roughly 75% of their projected Adjusted Funds from Operations for 2016, which is a comfortable level).

It requires some optimism to buy CCI here, perhaps a strong feeling of confidence that they’ll maintain technological relevance and can be ignored while the value of their tower sites builds into the next generation, or a certainty that there will be low inflation and the growing 4% dividend will be enough. I suited up to dive into the numbers for CCI with the assumption that I’d want to buy the stock because I think the numbers work out much, much better for CCI than they do for AMT… but I’m not quite ready yet. I am convinced that I’d rather buy CCI than AMT, but haven’t gotten through to a “buy” opinion just yet (and I should also mention SBAC, which has similar metrics — though that third competitor has not yet converted to the REIT structure and has mentioned that they don’t plan to until they’ve burned through their net operating loss carryovers — they don’t pay much tax because of those NOLs, so REIT status wouldn’t help much).

Goldman Sachs, for what it’s worth, has seen some potential in CCI and just added it to their “conviction buy” list, so it might be that I’m being too greedy in hoping for a little bit better price to justify the unknown “obsolescence” risk in towers. If it weren’t for that risk, I’d consider this a very easy buy with a 4% utility-like yield that’s growing at an above average 7.5% annual rate right now, so maybe you’ll see the risk and the opportunity differently than I do. For me, this goes on the watchlist.

For right now, I do think REITs are one of the few income sectors where quite a few of the stocks are taking a big enough hit in these early days of 2016 that they’re starting to appear attractive — and that’s because I’m losing what fear I might have had of a “shock” rise in interest rates over the next year or two, we seem condemned to incredibly low rates for a very long time yet.

I think COR remains a strong core investment in the REIT space, as does ROIC, but those are so operationally strong and well-respected that they’re yielding well under 4% at today’s prices and I like to see real dips before buying these. I suspect that the real outsize opportunity here is in the healthcare REITs, which have been taken down much more sharply than most REIT sectors and are at multi-year low prices despite continuing, in many cases, to be strong and high-yielding operators, and that’s why I’ve continued to nibble on names in that sector to spread my investment risk around a little bit.

REITs that should have non-cyclical businesses, and that have relatively low leverage and the real potential for 5-10% annual increases in their dividend (or more), look appealing to me for a low-interest-rate and probably low-equity-return environment over the coming year… particularly when the shares get chopped down to tantalizing levels. CCI isn’t quite there for me yet, but I think it has potential and I’m very close to being willing to take that first nibble — I would be surprised, absent some sort of market-wide crisis, to see CCI trade as low as $70, which is what we’d need to see to get a 5% annual yield at this point so, like I said, maybe I’m being too conservative in waiting on Crown Castle.

And yes, please keep in mind that REITs do often trade en masse — they don’t all move together all the time, but during times of market stress or interest-rate panic they are likely to travel in a group. That means, despite the fact that I’ve got REITs on the brain to a significant degree over the past couple months (often when ideas are thin on the ground, it’s the dividends that call to me), that I’m wary — and would urge you to be wary — of committing too large a portion of my portfolio to REITs, even if they’re in different parts of the REIT world. Currently, REITs make up something in the neighborhood of 15% of my individual equity portfolio (COR, MPW, DOC, ROIC, and now little tastes of VTR and OHI) and probably 10% of my portfolio overall (counting mutual funds, old 401(k)s, etc.) — that’s pretty close to the top of where I want to be in terms of an allocation to that sector, particularly since, like most of you, I have exposure to real estate value fluctuation through home ownership as well.

P.S. I also posted a quick note about the fact that I added to my Disney (DIS) position this week when it dipped below $90 after earnings — no big analysis, but I think it’s a cheap growth stock with compelling brands and great potential, despite ESPN hiccups that I think are over-analyzed, and wanted to note that in case you only read on Fridays.

Disclosure: of the stocks mentioned above I own shares of Apple, Facebook, Alphabet/Google, Criteo, Omega Healthcare, Physicians Realty, Medical Properties Trust, Ventas, Coresite, Ligand and Verizon. I won’t trade any of those stocks, or any others mentioned above that I don’t currently own, for at least three days following publication of this article.

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