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What are we looking for?

In the midst of trade tensions and geopolitical disputes, it is the cyclical sectors – communications services and energy are prime examples – that tend to suffer most. As investors, sector allocation is crucial to the wealth our portfolio creates and thus we are curious about the sectors that hold up the best during a market shakeout. Interestingly, the best performing S&P 500 sector in the current quarter as of Aug. 23, at 5.6 per cent, is a cyclical one – real estate – followed by information technology.

Today, we focus on the U.S. real estate sector, which is largely unaffected by tariff disputes and indeed benefiting from the current conditions of low unemployment and interest rates.

The screen

This strategy uses the Inovestor for Advisors platform to screen the S&P 500 real estate sector using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A positive free-cash-flow-to-capital ratio. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • Economic performance index (EPI) greater than or equal to one. This is a key criterion as it represents the ratio of return on capital to cost of capital. An EPI greater than one indicates that the company is generating wealth for shareholders – for every dollar invested into the company, more than one dollar is generated in returns;

For informational purposes, we have also included recent stock price, dividend yield and one-year return. Please note that some ratios may be reported at end-of-previous quarter.

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks as well as American depositary receipts).

What we found

By arranging our list based on descending market cap, Public Storage comes out on top. Public Storage is an international self-storage company that operates as a real estate investment trust. It also has the highest EPI of 2.5 on our list, showing us that the operations are quite profitable, and easily covering the company’s cost of capital.

With a slightly positive free cash flow to capital ratio, Simon Property Group Inc., a U.S. retail REIT and the largest U.S. shopping mall operator, pays a dividend yield greater than 5 per cent. From the look of its financials, Simon Property has steady operations (EVA and EPI metrics) and can be considered a quality company. Note, however, that the stock has had a one-year return of minus 18.9 per cent. Furthermore, investors should be aware that retailers will suffer from an escalating U.S.-China trade dispute since that would increase the costs of goods they are selling.

Readers are advised to conduct further research before investing in any of the securities shown here.

Select U.S. real estate stocks

CompanyTickerRecent Price (US$)Mkt. Cap. (US$ Mil.)FCF / Capital (%)EVA 12M Chg.EPIDiv. Yld. (%)1Y Rtn. (%)
Public StoragePSA-N259.5045,229.43.853.62.53.421.8
Simon Property Group Inc.SPG-N146.0344,980.40.940.71.55.1-18.9
AvalonBay Communities Inc.AVB-N206.1628,791.
HCP Inc.HCP-N34.1516,771.40.1158.81.94.627.8
CBRE Group Inc.CBRE-N49.2616,567.
Duke Realty Corp.DRE-N32.8311,839.
Host Hotels & Resorts Inc.HST-N15.6911,453.
Vornado Realty TrustVNO-N58.8111,221.71.6922.02.24.0-22.4

Source: Inovestor for Advisors

Noor Hussain is an analyst and account executive for Inovestor Inc.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 12/04/24 6:40pm EDT.

SymbolName% changeLast
Public Storage
Simon Property Group
Avalonbay Communities
CBRE Group Inc
Vornado Realty Trust

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