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Building Your Portfolio With Real Estate

John Reese

The media is all in a tizzy over acquisitions. This past weekend saw several deals announced worth, in total, $70 billion, according to The New York Times. These included Freeport McMoRan Copper & Gold (FCX Quote) buying Phelps Dodge (PD Quote), Bank of America (BAC Quote) purchasing U.S. Trust from Charles Schwab (SCHW Quote), and the Nasdaq Stock Market (NDAQ Quote) letting be known it wanted to buy the portion of the London Stock Exchange it doesn't already own. And there were others.

My regular readers know that the recent fever pitch of the acquisitions market, as well as other factors (such as the prices of commodities), has led me to focus on specific industries, such as mining and brokerage stocks.

One just-announced acquisition that got my attention was the purchase of real estate investment trust Equity Office Properties Trust (EOP Quote), the nation's largest office building owner and manager, by the private-equity firm, Blackstone Group, for $20 billion, plus the assumption of $16 billion in debt. Looking at this, I decided to check on what the guru strategies think of real estate stocks. I didn't limit my search to REITs, but included other real estate-related companies. In September I wrote about one real estate company, Realogy (H Quote), whose holdings include the real estate brokerages Century 21 and Coldwell Banker. Here are four other real estate-related stocks you might want to buy.

One of these is Avatar Holdings (AVTR Quote), which develops retirement communities in the Sunbelt. While no guru strategy gives Avatar its highest rating, a couple gave it their next-best rating. The strategy I base on William O'Neil's writings likes that Avatar's earnings have increased in four of the past five years, its price today is just a few cents below its 52-week high and its return on equity is a healthy 31.6%. Based on my understanding of Martin Zweig's strategy, Avatar is desirable because its long-term EPS growth rate, adjusted for inflation, is 87% and its three-year average net-profit margin is 9.49%, nearly double the 5% minimum the strategy requires.

Commercial real estate services firm CB Richard Ellis Group (CBG Quote) also gets some interest from the guru strategies. The O'Neil strategy likes it because its price is nearly at its 52-week high, it has little debt and its return on equity is 33.4%. The strategy I use based on Peter Lynch's writings favors CB Richard Ellis because its P/E/G ratio (P/E relative to growth) is a very desirable 0.42. A P/E/G of 1.0 or less is acceptable and less than 0.5 is great.

Jones Lang LaSalle (JLL Quote) is a real estate services firm that has the attention of both the Lynch and O'Neil strategies. The O'Neil strategy is impressed that the company has shown consistent earnings growth (earnings have increased in each of the past five years), its stock is within 5% of its 52-week high (the strategy looks for stocks within 15% of their 52-week highs) and its relative strength, a measure of how well a stock has performed relative to the market, is a strong 90. The Lynch strategy is happy to see Jones' P/E/G ratio be an impressive 0.33.

Arbor Realty Trust (ABR Quote), a REIT, is favored by the Lynch strategy because of its low P/E/G (0.40), solid EPS growth rate of 27.2% (based on the average of three-, four- and five-year historical growth rates) and modest P/E (10.76). The O'Neil strategy likes its stock price, which is a few cents below its 52-week high and the fact that earnings have increased in four of the past five years.

I'm not saying any of these companies is likely to be the target of a takeover. But they are worth considering to buy because they are doing well. Plus, there is a lot of private-equity money in search of investments, with the real estate industry being in the sights of these private investors.