Five Top-Ranked REITs on Sale: Should You Buy for 2016?

For U.S. real estate investment trusts (REITs), nothing could have been better if history repeated itself in 2015. This is because the REIT sector had a dream run in 2014, with the FTSE NAREIT All REITs Index gaining over 27%, thanks to Treasury yields and interest rate movements. But this momentum fizzled out in 2015, with the sector bobbing up and down without warning.

And while December’s 25 basis-point increase in the target funds rate by the Fed was widely seen a confirmation of domestic economic recovery, we don’t see any respite from the underlying threats to the REIT sector. Even the FTSE NAREIT All REIT Index managed to make a flimsy 2.29% run up in 2015.

Given their capital-intensive nature, REITs are more likely to be hurt in a rising rate environment as they will have to incur higher interest expense. On top of this, their dividend payout (which has been the major reason for their attraction) might end up looking less attractive than the yields on fixed income and money market accounts.

Therefore, worried about the safety of their portfolio, investors have started dumping several stocks in this sector. Even though this might seem like the only thing to do in such a situation, an analysis on the price decline in REITs will show that selling all of these stocks is a foolish thing to do now.

Why? Because often a stock is dumped due to the broader industry issues, or fiscal and monetary policies, which, in reality, might hardly have any significant impact on a company’s business.

So before keeping beaten down stocks at arm’s length, find out whether their negatives have been blown out of proportion. Also, find out whether at all their fundamentals and prospects will suffer.

In fact, if you look at the positive side of the rate hike, we see that it was backed by upbeat economic data. Gains in employment and growth in wages actually mean increased buying power and improved spending trends. And when economic activity gathers steam, demand for space automatically grows.

But supply of new space has remained low in most of the real estate categories as economic weakness in the past restrained landlords from developing newer properties. This, in turn, is leading to favorable demand/supply conditions. In fact, property fundamentals are improving, occupancy levels rising and landlords now have more power to command higher rents for their real spaces.

In fact, low valuation in stocks with good long-term growth potential might give investors a solid entry point. Therefore, although people fear buying stocks when they are up for sale, adding them with less initial investments can usher in great returns when they eventually appreciate.

How to Pick Such Stocks?

To find such cheap stocks with great growth potential, nothing can come in as handy as the Zacks Screener.

We screened for stocks with a Zacks Rank of #1 (Strong Buy) or #2 (Buy), which means that they are witnessing positive estimate revisions. But since these stocks are up for sale, with their prices tumbling, we looked for those top-ranked stocks currently priced as a percentage of the 52-week high-low range under 20 (a value of 0 indicates that the stock is trading at its 52-week low). Finally, we zeroed in on stocks with P/E ratio well at a discount to the industry average, making their valuation all the more attractive.

Here Are the 5 Stocks:

Bethesda, MD-based RLJ Lodging Trust (RLJ - Snapshot Report) is a REIT focused on investing primarily in premium-branded, focused-service and compact full-service hotels. Though this Zacks Rank #2 company is currently managing to stay afloat, just above its 52-week low of $21.04, the recent conversions coupled with acquisitions and renovation are expected to elevate its portfolio quality and drive growth in 2016 and beyond.

Earnings estimates for the company for 2015 and 2016 are trending up, suggesting further bullishness ahead. What’s more, its valuation remains attractive on a PE basis with the stock trading at 9.01x, a discount of nearly 34% to the industry average of 13.6x.

Headquartered in New York City, Rouse Properties, Inc. (RSE - Snapshot Report) is a REIT that operates as one of the largest mall owners in the U.S. The stock price is presently hovering around its 52-week low of $13.96. However, we believe this Zacks Rank #2 company’s solid leasing activity and decent number of capital projects would help it to ride on the growth trajectory. In fact, the acquisition of Carlsbad Mall bodes well and should expand its California portfolio.

Upward estimate revisions for 2015 and 2016 earnings add to the optimism. Finally, with the stock trading at a PE of 8.2x, which represents a discount of more than 48% to the industry’s average of 16.0x, the stock remains undervalued, thus offering a good entry point.

New York-based Outfront Media Inc. (OUT - Snapshot Report), formerly known as CBS Outdoor Americas Inc., is a lessor of advertising space on out-of-home advertising structures and sites across the United States, Canada, Mexico and South America. This Zacks Rank #1 stock is currently hovering above its 52-week low of $20.42.

However, strength in transit, digital and data initiatives and strategic measures are expected to drive its growth engine going forward.Moreover, analysts turned increasingly bullish on the company over the past two months, leading to a sharp spike in the Zacks Consensus Estimate for 2015 (up from 53 cents to $1.91) and 2016 earnings (up from $1.03 to $2.05). The valuation too looks cheap with the stock trading at a PE of 11.41x, reflecting a discount of over 16% to the industry average of 13.60x.

Select Income REIT (SIR - Snapshot Report), the Newton, MA-based company, which owns strategic, single tenant office and industrial properties throughout the United States, is far from its 52-week high of $26.88. But this Zacks Rank #2 stock has all the ingredients to climb ahead. Its same property occupancy and net operating income are growing and the strength of its leasing platform and the quality of its properties are expected to sustain this uptrend.

The upward revisions to its 2015 and 2016 estimates affirm its rise and with the stock trading at a PE of 7.42x, reflecting a discount of over 55%, it remains a preferred pick among the cheap stocks.

Newton, MA-based Senior Housing Properties Trust (SNH - Snapshot Report) is a REIT that owns senior living communities, medical office buildings and wellness centers throughout the U.S. Though this Zacks Rank #2 stock is presently near its 52-week low of $13.50, there are ample opportunities for growth. With a high-quality portfolio having mainly private pay assets, the company remains well poised for growth amid favorable healthcare supply and demand fundamentals and growing aged population in the nation.

Its earnings estimates for 2015 and 2016 are trending up, suggesting further bullishness. Finally, with the stock trading at a PE of 8.1x, representing a discount of over 40% to the industry’s average of 13.6x, the stock remains much undervalued.

Conclusion

While these five stocks might have plunged in 2015 for reasons ranging from company-specific to industry at large, their prospects look bright. They have the capability to digest near-term hiccups and emerge as winners in 2016 and therefore end up being on analysts' good books with positive estimate revisions. So just jump in and catch the anticipated growth trajectories in the above mentioned stocks and for some solid returns in the New Year.