Editor's note: This was originally published on RealMoney. It's being republished as a bonus for TheStreet.com readers.
One of the most important tools in the investor's kit is a set of quantitative standards for measuring the health of a particular corporation's balance sheet and income statement. Too much emphasis is paid to the story of a particular company or the outlook for its business prospects. All too often, stories tend to have fictional elements to them, and the future is not predictable.
I realize that this flies in the face of typical Wall Street analysis with its carefully calculated forecasts. I find it hard at times not to laugh at all the well-educated men and women who believe their elaborate spreadsheets that predict earnings six or seven years out. They mean well, but the investing landscape is littered with these spreadsheets, and they are all pretty much worthless.
Opinions and forecasts are nice, but it is far more important to know how the health of a company is right now, and how well it is managing its business to produce profits right now.
One of the best measurements for this was developed by Joseph Piotroski, an accounting professor at the University of Chicago. I have talked before about
using the Piotroski score to evaluate the condition of a company
, and it remains one of my favorite scoring methods. It is a nine-point scoring system that measures the balance sheet as well as the quality of earnings and quality of management. The higher the score, the better the condition and prospects of the company.
Three Real Estate Picks
I recently used the method to look at several real-estate-related companies, primarily REITs
real estate investment trusts, and found several that should be of interest to long-term investors.
The first two I found are in the hotel business. In spite of the weak economy, the hotel business has pockets of strength. There are several reasons for this, some related to the weak dollar and foreigners' traveling to the U.S., as well as the fact that business travel continues even as domestic foreign trade declines.
TheStreet.com TV: REITs Remain Resilient
Mall traffic is down because of retail bankruptcies and a strapped consumer, but Jay Rosenberg, portfolio manager for the five-star First American Real Estate Fund (FARCX) - Get Report, says REITs will remain resilient. Here are his top real estate plays.
To watch the video, click the player below:
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Hersha Hospitality Trust
is a REIT that owns 35 hotels primarily on the East Coast of the U.S. The company reported a much stronger than expected first quarter this year, with revenue up 16% and funds from operations leaping ahead 67%. The shares trade below book value and pay a healthy dividend that yields over 11%. Hersha recently completed an equity offering to raise $56 million that was used to pay down short-term borrowings and give the company greater financial flexibility.
The second hotel concern is also a REIT,
Sunstone Hotel Investors
. Sunstone tends to own larger, more upscale hotels. It owns 45 hotels with over 45,000 rooms throughout the U.S. It operates the hotels under national brand names such as Marriott, Renaissance and Hyatt. Sunstone also reported a strong first quarter with solid gains in revenue and funds from operations.
The company recently sold the Century Plaza California Hyatt to an investors' group including hedge fund operator D.E. Shaw for 4335 million. Sunstone used about $130 million of the proceeds to buy back over 11% of its shares in a Dutch tender auction and retained the rest to support its balance sheet and take advantage of future opportunities. The shares appear to be cheap, trading at 75% of book value with a 12% dividend yield. At least two insiders believe so, as there have been two large insider buys in recent months totaling over $2 million.
The third stock to make the cut is one of the few REITS that has had a positive return in the past 52 weeks.
Annaly Capital Management
invests in mortgage-backed securities, of all things. It recently raised over $926 million to take advantage of the opportunities that management sees in the tumultuous marketplace.
Annaly recently raised its quarterly dividend and now yields 14%. The shares trade just a little above book value. Although Annaly shares trade at 75% of the annual high, they have returned 7% in the past 52 weeks. Annaly is considered by many investors to be the class of the mortgage-backed securities REITS, and it should do very well as the mortgage market stabilizes in the months ahead. Again, insiders believe so, as there has been consistent insider buying in the shares.
All three of these stocks have high yields and trade near or below their book value. Equally important, they all have high Piotroski scores that are highly predictive of long-term prospects. Long-term investors should be buyers. I will be.
This was originally published on
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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Hersha Hospitality Trust to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Tim Melvin had no positions in stocks mentioned, although positions may change at any time.
Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback;
to send him an email.