With the first half of 2020 in the books, investors face a lot of uncertainty. Despite record unemployment, a recent sharp increase in cases of COVID-19, and a worrying increase in the death toll, the stock market has proven resilient. At recent levels, the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) is only off about 1.4% year to date and is nearly breakeven when including dividends.
It's been a bizarre year for real estate investing and real estate stock. The First Trust S&P REIT ETF (NYSEMKT: FRI), which owns a stake in over 150 REITS (real estate investment trusts, generally a very safe investment in downturns), is down 21% this year. Homebuilders, which often suffer during a recession, have recovered sharply from the bottom of the March crash. The SPDR S&P Homebuilders ETF (NYSEMTK: XHB) is down less than 2% year to date and up 80% from the late-March low. Real estate lending, like all lending, is hitting banks hard. The SPDR S&P Bank ETF (NYSEMKT: KBE) is down 37% year to date.
So what's a real estate investor to do? Buy best-in-class businesses at good value, and keep a long-term focus and holding period. Three that look appealing right now are senior housing and healthcare REIT CareTrust REIT Inc. (NASDAQ: CTRE), best-in-class homebuilder NVR Inc. (NYSE: NVR), and beaten-down megabank Wells Fargo & Co. (NYSE: WFC).
Built for a long-term need
The COVID-19 pandemic has hit the elderly extremely hard, and early in the pandemic's spread into the U.S. it ran rampant through senior housing and nursing homes, killing thousands of the community most at risk of the deadly disease.
As a result, investors sold heavily out of nursing home REITs, looking to avoid financial exposure to these companies that saw their risk profiles potentially change significantly. At this stage, I think the risks have been addressed by the top care providers, and they're probably a safer investment than it would seem.
Of the group, my top pick continues to be CareTrust, the small company that was spun out of Ensign Group about six years ago and is still a tiny player with about 200 real estate properties in its portfolio. This real estate investment trust has a very strong balance sheet, pays out only about 75% of funds from operations to cover its dividend, and has a dividend yield over 5.8% at recent prices.
At recent prices, shares are still down more than 30% from the 2020 high, a bargain price based on the market's ongoing worries about COVID-19 and its impact on senior housing. And while there's still risk, CareTrust is well structured and its care provider partners have done well to keep residents and patients safe so far.
Most importantly for a long-term investor, the short-term concerns mask the long-term need for growth in this area. U.S. senior healthcare and housing is in need of significant investment over the next decade as the 65-plus population passes 80 million. Tiny CareTrust is set to be a big winner from that trend, and current prices make it too appealing to ignore.
A top homebuilder getting overlooked
With shares trading for more than $3,200 each, it's understandable why NVR may not be on your list; that's likely at least part of the reason it hasn't enjoyed the same runup that many of its smaller (and lower share priced) peers have enjoyed in recent months.
But even at this prohibitive price, investors should consider adding NVR (even if you only buy a fraction of a share as many brokers are starting to allow). It has an incredible track record of delivering strong investor returns, with a business model that relies on less debt leverage than most other homebuilders. In typical economic downturns, that means NVR is less likely to struggle from owning too much land and generating too little cash to pay the debt it has.
Its relative underperformance this year is what makes it really appealing now, especially when compared to its longer-term results. Over the past decade, NVR has built 392% in returns for investors versus 260% in total returns for the S&P 500 and 228% in total returns for the S&P Homebuilders ETF.
A risk-reward bet on this major home lender
Wells Fargo hasn't been a very good investment for years. Over the past five years, the stock price is down 54% due to the "fake accounts" scandal that rocked it to the core and led to unprecedented regulatory sanctions and the ouster of several key executives, including two CEOs. Since the 2018 peak, shares are down a brutal 61%.
Moreover, the rest of 2020 -- and probably well into 2021 -- is likely to prove ugly for the banking sector.
So why buy Wells Fargo right now? Because it's still a great underlying business, with the right leadership in charge now, and a great legacy of mortgage underwriting. And at recent prices, I think it's an excellent long-term value.
The second quarter is undoubtedly going to be far worse than the first, and investors will get a better idea how the company's dividend will be affected and how the loan portfolio held up under the weight of record unemployment.
But even if it's a "bad" quarter and the stock falls more, I expect Wells will still prove a great investment over the next decade. It may take some intestinal fortitude to hold during the ongoing COVID-19 downturn, but the long-term growth in demand for homes, and the long history of great mortgage lending, have Wells Fargo high on my list of real estate-related stocks to buy now.
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