Here's an Under-the-Radar Strategy for Picking Winning Retail Real Estate Investment Trusts

Investing in retail stocks comes with its own set of challenges. E-commerce is still disrupting brick-and-mortar commerce, forcing companies to find ways to adapt or risk being left behind.

In this video from Motley Fool Backstage Pass, recorded on Jan. 6, Fool contributors Jon Quast, Charlene Rhinehart, and Travis Hoium talk about it. Charlene has a great approach for picking winning real estate investment trusts (REITs) in the retail space. Travis brings up how retail companies can increase relevance by offering easy from-home shopping.

Jon Quast: The question that we wanted to bring to the table here is, how are you approaching retail as an investor? Because there's clearly two very different scenarios playing out here when you have Macy's, Bed Bath & Beyond a little bit struggle, and then Dick's Sporting Goods (DKS -2.27%) not seeing that. How are you as an investor approaching it?

I think, Charlene, you're up first here.

Charlene Rhinehart: When it comes to retail, you really have to do your homework. I haven't been involved much in retail lately because of all of the shifts, because more companies are going from the brick-and-mortar base model to e-commerce.

When I do pay attention to retail, I look at the companies at the top of the chart. Are they able to continue to gain market share? Do they have an economic moat? Are they able to leverage technology in their business? There are some companies that are just at the top of the charts, whether it be based on price or because of market share. I continue to look at those companies and see if other companies have the ability to compete.

Then I also look at retail REITs. That's one thing that I paid attention to during the pandemic because, while a lot of REITs and retail stores shut down, there were retail REITs out there, specifically grocery-anchored shopping centers that had stores. Those stores were still filled. Stores were still making money, but they were probably one of those few places where people were still going to during the pandemic.

I'm looking at places or opportunities that no matter what happens in the economy, what will people need? What are those must-haves? Food was a must-have. When I'm looking at retail, I'm looking at what's going to stay around, whether it be brick-and-mortar or e-commerce. Where are the opportunities at?

Quast: That is such a really interesting approach. I hadn't thought about that. Look for the real estate investment trusts with a grocery store anchoring it because you know that people are going to keep going there. That's a really good point, Charlene.

Travis, how about you? How are you approaching retail?

Travis Hoium: One of the things I'm thinking about and I'm sort of workshopping this with you guys. Let's see if you identify with this. It seems like what's going on. The last decade has really been about e-commerce and the growth of Amazon and related companies. But I think what we've learned over the past couple of years is that specifically with Amazon, it wasn't so much about price, it was really about convenience. It was that I just want to sit home, scroll through my phone, and buy the things I need to buy rather than going to the mall or going to the store. They were not doing the Walmart model where they were going to beat everyone on price and nobody else could compete.

Over the last two years, I think what we've seen really develop, this was evident with the results that we talked about, is it seems like there's this grocery plus. Target's (TGT -0.67%) done really well in the last few years. I think that's because you can go now drive up to Target, not leave your car, but they will put groceries in the back your car along with some towels and the pillowcase that you need.

Why is Bed Bath & Beyond struggling? Because I don't really want to go to Bed Bath & Beyond specifically to get a towel, I just want that to be something that I get when I'm doing something else that I would be doing like getting groceries that I have to do on a regular basis.

Then, the other retailers that seem to be doing well are these specialty retailers. Dick's would fall into that. If you're shopping for sporting goods, that's something I even enjoy doing. You're looking for something specific, but you want to walk through the running shoes section or through the outdoor apparel, whatever you're into, there something for everybody at Dick's and it's an experience. I don't think of a place like Bed Bath & Beyond as experience.

That's what we're seeing is the last decade was convenience brought to you by the internet. Now, we're seeing specialization and this grocery-plus concept really be what's successful. Companies like Bed Bath & Beyond are stuck in the middle. They don't fit in either of those categories.

Quast: I think that's a good point, Travis. For years, Bed Bath & Beyond, I think that they have, by not saying it, but saying that they do have that problem of attracting customers into the store. Because how do they do it? With those frequent coupons that they send out to their mailing list or just unsolicited. Some show up at my house. But that is how we're going to get you into the store because otherwise, what is the driver that gets you in here? I think that's a really good point.

I did want to acknowledge Richard O. over in Sli.do. He gave us a retail basket; Target, Home Depot, Amazon, and MercadoLibre. You're definitely looking at some best-in-class retailers who are definitely poised to keep going for quite some time.

Hoium: Yeah, I like that a lot. I actually also like Charlene's idea of REITs in the retail space. I remember following Simon Property Group. They're more malls, but a big REIT. Just got crushed early in the pandemic. But if you would have bought that stock, they hit almost $40 a share. They closed at $163 a share today. [laughs] You don't think of a mall REIT being something that can 4X in a little over a year, but it has, and it's because I think the underlying businesses, even if some have gone out of business, they found companies to replace them. That's why these REITs have done really well. I like that as a play because you don't have to bet on one specific model or one specific concept.