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REITs: An Overvalued Asset Class

I continue to believe that the bond conundrum is ending, and although I do not share the nearly consensus view that housing is a bubble, there could be a plateau. This is evident in housing stocks, which have settled in trading ranges . But today I set my screens to the Real Estate Investment Trusts (REITs) and found nine names that are more than 40% overvalued according to my models -- which is a warning that these stocks should be sold on strength.

The combination of those valuations with the fact that the yield on the 30-year appears to be heading for 5% and higher in 2006 means REITs are vulnerable.

Therefore, I set my screens on the industry to identify companies that are at least 40% overvalued with hold-sell ratings according to my model. The result was clear: These nine REITs are overvalued and investors should be prepared to sell on strength. Some of these stocks have patterns similar to the housing stocks, and some had new 52-week highs just last week. Here are the names that should be sold on strength.

Arden Realty (ARI - Get Report) owns and manages commercial office properties located in southern California. Its shares are 51.2% overvalued, with fair value at $30.24. The weekly chart profile is overbought with the five-week MMA at $42.93. My quarterly value level is $41.98 with the 52-week high set on Friday at $45.80. Shares were recently trading at $46.08. There are no risky levels for ARI, so additional new highs are feasible. The close for November will become an input to my model and I will follow-up with a risky level if one is generated.

Crescent Real Estate Equities (CEI) owns and manages a portfolio of premier office buildings throughout the U.S. Shares are 44% overvalued with fair value at $14.14. The weekly chart profile is positive with the five-week MMA at $20.02 and the 52-week high at $20.82 set on Oct. 10. Friday's close was right on a monthly pivot at $20.36. My annual value level is $16.16 with a quarterly pivot at $21.35 and annual risky level at $27.27. Shares were recently trading at $20.42.

General Growth Properties (GGP - Get Report) has a diversified portfolio of properties throughout the U.S. They also develop and sell land for residential, commercial and master-planned communities. Shares are 140.5% overvalued with fair value at $18.55. The weekly chart profile is positive with the five-week MMA at $42.51 and the 52-week high at $47.48, set on Aug. 2. My annual value level is $28.45 with quarterly risky levels at $46.67 and $48.25. Shares were recently trading at $45.05.

Macerich Co. (MAC - Get Report) owns and leases regional and community shopping centers throughout the U.S. Shares are 53.1% overvalued with fair value at $43.65. The weekly chart profile is positive with the five-week MMA at $63.91 and the 52-week high at $71.22, set on Aug. 3. My annual value levels are $45.33 and $43.31 with quarterly risky levels at $72.73 and $76.15. Shares were recently trading at $66.68.
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