Last week, I gave you a little sneak peek into my class lecture at Penn State. But I purposely left out my prediction for 2023.
It was the first time I’ve given out this prediction publicly in 2023. And I wanted to give my team at least one week to pick it apart, flesh it out, and find out if it stands up against our research.
You see, there are no sacred cows at Wide Moat Research. I have favorite companies that I have owned and followed for years. But if the fundamentals change tomorrow on any one of them, I will pivot immediately.
Numbers don’t lie and they are not sentimental.
But we humans are, and thus need to make sure we can back up our premonitions with facts.
That’s why I can promise you my prediction will help you prepare your portfolio for the rest of 2023.
So what do I see in store for us ahead and how well did my prediction stand up against our team’s research?
Read on to find out.
My Favorite Asset
Getting my start as a real estate developer managing multimillion-dollar deals, real estate investment trusts (REITs) hold a natural interest for me.
They provide exposure to real estate – a limited, hard asset – without the lack of liquidity. And they allow diversification because they touch almost aspect of the financial markets.
My years of experience researching and valuing REITs, plus the thousands of articles I’ve published on them, is the reason I was asked to give a guest lecture on them at Penn State last week.
I started off that class with a version of Jim Cramer’s “Lighting Round.” I asked students to call out the name of any REIT, and I would give them my synopsis of it in a minute or less.
For example, I would tell them what I liked about the REIT, what I disliked, and what fundamentals the students needed to pay attention to regarding that particular company.
Then I covered how REITs have performed overall in 2022 and the start of 2023 before diving into the state of the economy and giving this prediction…
Not only do I believe the economy will fall into a mild recession around mid-year… But 2023 could be a fantastic year for REITs.
Now, I’m not a psychic. And I don’t pretend to be a market prophet either. But sometimes, a combination of instinct and experience kicks in, and you see patterns forming in the financial market.
I know I’ve long been a proponent of REITs. They’re my area of expertise and have become my favorite investment.
But I didn’t want my bias to affect my analysis of what to expect from REITs in 2023. So let me lay out my team and my research behind this prediction.
2023 Could Be a Fantastic Year for REITs
Let’s start with the first part of my prediction…
Despite better-than-expected U.S. GDP (gross domestic product) growth of 2.9% for Q4 2022, I still believe we’re headed toward a mild recession.
The headline GDP rise last week masked a sharp decline in consumer and business demand at the end of 2022.
Reading the real estate tea leaves, the contraction in the residential sector and current spillover into manufacturing are signs of weakness as the Fed keeps policy rates restrictive.
With housing demand deteriorating, weakness will also spill into other rate-sensitive sectors such as cars and other big-ticket items.
Even my Uber driver as I was heading to dinner last week, who also manages a car lot at the state college, told me that car loans had spiked… And he’s seeing distress in the sub-prime space.
Yet… REITs remain resilient.
According to BCA Research, REIT dividends grew by 10% on average in 2022. That compares to 7.1% dividend growth for the S&P 500 – nearly 30% percent better.
They’re also above the historical average of 6-8% annual growth for the sector.
To top that off, in the first three quarters of 2022, 81% of REITs reported increases in cash flow, measured by FFO (funds from operation) – the valuation metric used for REITs instead of earnings – per share. And, on average, FFO per share rose by 20% over that period year-over-year.
Which leads us to part two: 2023 could be a fantastic year for REITs.
So far this year, REITs have been a top-performing asset class… And we’re just one month into 2023.
Take a look at how the Vanguard Real Estate ETF (VNQ), a benchmark we use for the sector, has done so far compared to the broader market.
It keeps getting better… Based on our research, nine of the major REIT segments have generated double-digit returns so far this year.
And if you look up current REIT valuations right now, they’re still below long-term averages for most sectors. This suggests a lot of upside is still on the table.
As I said last week, REITs are still in their early innings, and the opportunity for them to expand is huge.
Which is why our research team has quite a few “strong buys” on our shopping list. And we’re preparing to make recommendations on some of the safest names in the face of the upcoming recession. So, get ready to see a REIT-buying frenzy.
In the coming weeks, I’ll be sharing quite a few of these bargain deals and why each one is poised to help you profit.
So if REITs aren’t on your radar for 2023, they should be.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research