While the stock market dipped into bear territory just a couple of weeks ago, it's since recovered a bit and now is in correction territory. That makes this a good time to pick up some shares in companies with beaten-down prices but strong performance records and good prospects.
A correction is generally considered a drop in a major market index like the S&P 500 of between 10% and 20%. And the S&P 500 was about 18% off year to date as of June 27, so that fits the bill. What also fits the bill are three real estate investment trusts (REITs) that are part of that benchmark index.
There are about 30 REITs in the S&P 500 at any time, and I chose the three that are each the largest of their kind: American Tower (AMT 0.17%) in infrastructure, Prologis (PLD -1.15%) in industrial, and Equinix (EQIX 1.10%) in data centers.
Being a member of the S&P 500 is particularly important right now. Institutional investors who moved massive amounts of money out of the market will often favor these stocks when they move money back in, since that index is one of the major benchmarks against which these money managers' performance is measured.
No time like the present
We're not talking about market timing. History shows that the biggest moves in any long-term rally occur in a very short period of time, including a day or two or a week.
While we certainly don't know yet if we're in a sustained rally now, we do know the S&P 500 rose nearly 7% the week of June 19 (markets were closed Monday, June 20). And as the chart below shows, these three large REITs rallied right along with it.
Each of these longtime performers has its own story about the past and arguments for future gain based on its business moat and the prospects for its industry.
American Tower, for instance, is the largest of all U.S. REITs with a market cap of about $122 billion. It has a global portfolio of more than 220,000 communications sites that major wireless carriers and other private and public customers depend on for the rollout of 5G and other networks that connect end-users to the digital world.
Prologis, meanwhile, currently has a market cap of about $89 billion and about 1 billion square feet of logistics space around the world. It's adding to its massive presence in this hot sector by snapping up Duke Realty, the second-largest industrial REIT, for $26 billion.
Then there's Equinix, with a market cap of about $62 billion and a network of more than 220 data centers in the Americas, Europe, Africa, and Asia. A wave of acquisitions has left Equinix as one of the few independent operators of such critical infrastructure, and easily the largest in an industry with a particularly high cost of entry and indispensability.
AMT Total Return Level data by YCharts
Long records of outperformance and a runway to more
As the chart above shows, each of these REITs also has a long record of outperformance to build on, besting the S&P 500 in total return since the onset of the Great Recession nearly 15 years ago.
Dividend growth is also important to REITs, since their calling card includes both share price appreciation and continuing payouts. The numbers show you can count on that to continue, too.
American Tower is currently yielding about 2.2% after raising its dividend for 13 straight years, including by about 18% in the past three years. Prologis is at 2.6% after nine straight years of dividend boosts, including a 9.5% jump since 2019, and Equinix is yielding about 1.8% after seven years of dividend increases, including a three-year rise of about 8%.
All three have promising payout ratios, too, with each of them right at about 50% based on current cash flow.
Funds from operations (FFO) is a key measure of how REITs handle their cash, and that's positive too. In the past five years, American Tower has boosted FFO by 87%, Prologis by 155%, and Equinix by 98%. The ratio of share price/FFO per share is also reasonable for each REIT, showing that they still remain reasonably priced: Prologis, at about 16 times FFO, is the bargain of the bunch, while American Tower is about 22 and Equinix at about 27x.
A good chance to correct your portfolio
The correction we're in now is a good time to choose some equities that promise to participate in any rally to come. These three S&P 500 members are prime candidates for that consideration.
I don't own any of them but I do own competitors in their industries: communications tower operator Crown Castle International, small-warehouse specialist Terreno Realty, and data-center owner Digital Realty. And I'm currently mulling adding one of the three we looked at here or swapping one for one of the three I have now.
