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 Quote) 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 Quote) 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 Quote) 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 Quote) 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.