ETF Teardown: The Best REITs

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements and allow investors to get in early on what they believe are tomorrow's big trends.

Investors bullish on future growth in real estate can turn to the iShares Dow Jones U.S. Real Estate ETF, whose top holdings include Simon Property Group (NYSE:SPG) and Public Storage (NYSE:PSA). But because this ETF invests in a number of REITs, its broad diversity also limits your upside -- and investors may dilute stellar returns from that one amazing company in the crowd.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best investments in real estate. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, the 5,500 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Biofuels," for example, or "Drug Delivery."

Selecting the REIT-Diversified label in CAPS gives you a list of 56 companies that trade on American exchanges. This particular collection of investments has performed worse than the general market in the past year, down 26.5%, while the S&P 500 has dipped by 18.7%.

To gauge which companies the CAPS community thinks offer the best opportunities in this particular space today, we'll sort a sampling of these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine a few companies to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Getting down to the nitty-gritty
Here are some diversified REIT stocks I've gleaned from CAPS today.

If a tree falls ...
With residential homebuilders such as Lennar (NYSE:LEN) and KB Home (NYSE:KBH) still stinging, timber sales have fallen sharply. Strong demand for performance fibers, as well as demand for higher- and better-use rural properties, helped Rayonier offset the decrease in timber prices, though. The timberland management company did see sales fall to $284.2 million in the first quarter, compared to $299.7 million last year. But earnings rose 16% to $40.6 million, compared to $35.1 million a year ago.

The near future doesn't show a lot of upside from here, though -- the company anticipates reporting second-quarter and annual earnings results that are lower than last year’s, thanks to ongoing softness in timber and real estate markets. The good news for investors is that despite the lowered forecasts, the company announced it will maintain its regular $0.50 dividend, giving it a healthy 4.4% yield. Despite economic real estate woes, CAPS members remain bullish on timber, with 291 out of the 298 members rating Rayonier predicting that it will outperform the S&P.

Looking to the Northstar
While few companies that deal in debt and securities are avoiding the pain of the current real estate slump, small caps like Northstar may be able to take advantage of the challenging economic times. In fact, the company’s small size and significant level of insider ownership -- along with other impressive metrics -- capture many of the attributes that makes for a winning investment.

Northstar’s management is looking to take advantage of what CEO David Hamamoto sees as some of the best market opportunities in years. The company recently had its majority-owned health-care real estate venture, Wakefield Capital, LLC, sell $100 million worth of convertible preferred equity interest. The company plans to combine the approximately $90 million it will receive from the transaction with another $80 million it raised in May to enhance its liquidity position and give it the flexibility to pursue opportunities.

With Northstar's stock taking another southern drop lately, the company's $0.36-per-share dividend gives it greater than an 18% annualized dividend yield. Not surprisingly, 295 out of 321 CAPS members rating Northstar expect it to outperform the broader market going forward.

Lead a horse to water ...
Plucking individual stocks from the real estate sector is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than blindly accepting a recommendation. After all, even the best stock pickers can be horribly wrong.

Do you agree that real estate is poised for a rebound? Or is the bottom still a ways away? Give your own opinion at Motley Fool CAPS.