VNQ

The Role of Luck in Investing and How To Think About It

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Dear members: — For every Amazon (AMZN) that made it, there are hundreds, maybe thousands, from the dot-com era that didn’t. Very few remember Pets.com or etoys.com, both of which went belly up during the dot-com meltdown. For every Tesla (TSLA), there is a DeLorean Motor Co. We might have completely forgotten about DeLorean were it not for the blockbuster movie, Back To The Future, that immortalized its futuristic sports car. — For every streaming enterprise like Netflix (NFLX), there is a Napster that failed. Most of us probably don’t even remember the original Napster, which encountered legal troubles before closing shop shortly after the dot-com bust. For every Alphabet (GOOG, GOOGL), there’s an AltaVista or Netscape. For every Apple (AAPL), there … Read more

Report Updates — Did You Throw the Baby Out with the Bathwater?

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Hi everyone: Brian here. I hope you are having a nice Labor Day holiday weekend.  We wanted to bring your attention to a number of stock report updates. Both Alibaba (BABA) and Korn/Ferry (KFY) have registered one of the highest ratings (9) on the Valuentum Buying Index. To garner such a high rating, a company would have to be considered undervalued on a discounted cash-flow basis, undervalued on a relative value basis, as well as exhibiting strong technical/momentum indicators. Alibaba looks like it could pop quite a bit from current levels after technically basing for months, and while risks related to the name are tremendously high given rising U.S.-China tensions, shares sure look undervalued to us. Korn/Ferry’s shares also look … Read more

ICYMI: Let’s Play Devil’s Advocate: What’s the Bear Case for Realty Income?

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By Brian Nelson, CFA We like Realty Income Corp. (O) a lot, but it’s not hard to see that the REIT could potentially have all the makings of a black swan. For one, the stock is loved by almost everyone–REIT investors, income investors, and dividend growth investors alike. Many are simply enamored by its monthly dividend, which it has raised nearly 120 times since it was listed on the NYSE in 1994. Over its 54-year history, the REIT has paid 632 consecutive monthly dividends, too. There’s a ton of things to like about Realty Income, but for this note, let’s build and examine the bear case, one that can be broken into three pillars: 1) its retail exposure, 2) its … Read more

Public Storage Picks Up Simply Self Storage; M&A Remains Hot in Self Storage

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Image Source: Public Storage By Brian Nelson, CFA On July 24, Public Storage (PSA) announced that it had agreed to acquire Simply Self Storage from Blackstone (BX) Real Estate Income Trust (BREIT) for $2.2 billion. The news follows the Public Storage-Life Storage (LSI) takeout saga that ended with Life Storage running to Extra Space Storage (EXR) for a deal. A PSA-LSI deal had made a lot of sense, and we’re not sure why LSI wanted nothing to do with PSA, but it may have had to do with a poor cultural fit. LSI apparently said it wasn’t for sale right before it tied the knot with EXR–moves that just didn’t seem to add up, in our view. In any case, … Read more

ALERT: Going to “Fully Invested” in the Best Ideas Newsletter Portfolio

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Image: Since the publishing of the first edition of the book Value Trap, the stylistic area of large cap growth (SCHG) has meaningfully outperformed both the equal-weight S&P 500 (SPY) and small cap value (IWN). Summary of Best Ideas Newsletter portfolio changes UnitedHealth Group (UNH): 0% –> 4%-6% Booking Holding (BKNG): 0% –> 4%-6% Chipotle (CMG): 1%-2% –> 6%-8% Technology Select Sector SPDR (XLK): 0% –> 4%-6% By Brian Nelson, CFA With the debt-ceiling debate behind the markets, the regional banking crisis largely in the rear-view mirror, and the Fed winning the fight against inflation, a continuation of the strength in the markets as witnessed from the October 2022 lows can probably be expected. We “rode” the latest upswing with … Read more

ICYMI: The Impact Rising Interest Rates Have on Equity REITs

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Image: REITs have not performed as well as one might have thought. The Vanguard REIT ETF has underperformed the broader market considerably since 2015, while dividends per share have not grown much, if at all, since 2005. Source: Vanguard By Brian Nelson, CFA The question on most everyone’s minds: How will equity real estate investment trusts (REITs) fare in the current rising interest-rate environment? The topic has long been debated and studied, and there are myriad opinions on the subject. From where we stand, however, there are two main moving parts consisting of fundamental and investment dynamics that investors should be aware of. Let’s have a look. Fundamental Considerations In the discounted cash-flow (enterprise) valuation context, a rising nominal interest rate (real + inflation) … Read more

Call Me Unconcerned

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Image: Large cap growth has dominated returns the past five years. The Best Ideas Newsletter portfolio continues to have significant exposure to this area. By Brian Nelson, CFA When it comes to the financial markets, the debt ceiling debate is nothing to worry about. Countries (sovereigns) cannot generally default on debt that is denominated in their own currency. The concern that there will be any sort of calamity if the U.S. government doesn’t raise the debt ceiling is far overblown, in our view. The political will of the U.S. to pay its debt will only resolve itself in time, and any risk premium built into Treasuries as a result of the debt ceiling showdown will be fleeting. Of course, nobody … Read more

ALERT: We’re ‘Raising Cash’ in the Newsletter Portfolios

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Image: American Union Bank, New York City. April 26, 1932. Public Domain “We firmly believe that an investment in a bank must come with the acknowledgement of the distinct possibility that another financial crisis may occur at an unknown time in the future. Why? Banks do not keep a 100% reserve against deposits. Our good friend George Bailey knew this very well when he tried to discourage Bedford Falls residents from making a “run” on the famous and beloved Building and Loan.” – Brian Nelson, CFA, September 4, 2013   SUMMARY OF CHANGES Best Ideas Newsletter Portfolio Johnson & Johnson (JNJ): 4%-6% à 0% Exxon Mobil (XOM): 4%-6% à 0% Chevron (CVX) 3%-5% à 0% Dollar General (DG): 3%-5% à 0% Korn/Ferry (KFY): 1%-2% à 0% … Read more

We Woke Up on the Wrong Side of the Bed

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By Brian Nelson, CFA Large Cap Growth Still Dominating Small Cap Value After the ‘value factor’ put up its worst performance in history during 2020, some retracement should have been expected in the subsequent 12-18 months, but large cap growth – our favorite stylistic area – continues to outperform. Since the publishing of the first edition of Value Trap: Theory of Universal Valuation in December 19, 2018, an ETF that tracks large cap growth (SCHG) has outperformed an ETF that tracks small cap value (IWN) by more than 45 percentage points. Using data that goes back to before the invention of the computer and television, researchers will tell you that there’s something called a small cap value premium. However, in … Read more

Why Are the Dividends of REITs So Risky?

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By Brian Nelson, CFA Not all REIT dividends are safe. Many REITs remain capital-market dependent, and some office REITs, retail REITs, and healthcare REITs may be difficult places to generate dependable long-term income in the coming decades, in our view. Office REIT SL Green (SLG) recently cut its payout 13% on December 5, 2022, while another office REIT Vornado Realty Trust (VNO) cut its dividend 29% on January 18, 2023. These are just two of the latest high-profile REIT dividend cuts, and there may be more to come. Contrary to popular opinion, the REIT sector has not been a great source of dependable, reliable income, particularly during the COVID-19 crisis. Five REITs cut their dividends in 2019: Medalist Diversified REIT … Read more