REIT + Health Care = Hot Stock

NEW YORK (TheStreet) -- Consider that an exchange-traded fund, Healthcare iShares (IYH), that tracks the health-care sector is currently up 9.5% year-to date. With the passing of the Affordable Healthcare Act (only time will tell if it is affordable or not) there will be a lot more customers in the health-care system.

Here is a current chart of this ETF:

In addition to this red-hot sector, the REIT sector is also under heavy accumulation. Investors who are not happy with a 10-year Treasury yield of 1.5% and CDs that are currently paying next to nothing are venturing out and seeking yield.

Last year, it was the high-paying large-caps that benefited from this feeding frenzy. This year, one of biggest beneficiary of investors seeking yield is the REIT stocks. I wrote about three such stocks back in early May here on the TheStreet.com

An ETF that track the U.S. REIT sector, streetTRACKS Dow Jones Wilshire Reit Fund ( RWR), is now up 13.5% on the year. Remember, this is against a backdrop of a Standard & Poor's 500 that is up just 6.4% for the year.

Here is a current chart of this REIT exchange-traded fund:

Now, what if we can find a stock that combines both the health-care sector and the REIT sector into one nice package, and offers a healthy dividend yield of 5%?

Well, let's give it a shot...

The name of the stock is Health Care REIT ( HCN). Wow, that's a good start! All the right names are present. Headquartered in Toledo, Ohio, the company invests in health-care and senior housing facilities in 46 states.

Market capitalization is a very respectable $12.8 billion and the stock, in my opinion, is suitable for investors seeking income first and capital appreciation second

I just love a little growth along with my dividends! I hate investments that just pay income and have never delivered any capital appreciation.

Let's take a peek at the average total returns of this stock over the years:

Very nice! Who would not have been happy with a 15.1% average total return over the last 10 years? The stock has delivered some very nice capital appreciation along with those dividends. That's like getting a nice big, fat kosher dill pickle along with your corned beef sandwich. Maybe a little coleslaw, too.

The last five years have also been real nice. That average total return looks really good against a market that has a negative return over the last five years! That works out to an average of 17 points of alpha during that timeframe.

That three-year return also looks better than a corned beef sandwich: 27.2% per year should have put a nice smile on your face.

Also, nothing wrong with another 18.4% over the last 12 months. How about the fact that the stock was actually up 0.2% in 2008? That was the year the market was down a gut-wrenching 38.5%.

When I compare the stock's performance against just over 2,800 other stocks, it gets very nice "A-" grade.

Now, so far we have done nothing but look in the rear-view mirror with this stock. In my book, looking at performance of a stock is very, very important. It gives me a good idea of how capable management is at lining the pockets of the shareholders.

We have learned time and time again, however, that valuation is also a very important consideration when analyzing a stock.

OK, so it is not the cheapest stock in the market. A forward PE ratio of 15 is not unbearable. When you consider that you are also getting a 5% dividend, I think you can justify the current valuation of being tolerable.

When all is said and done, you have a stock that combines two of the hottest sectors in the market. You have a stock that has delivered great returns to shareholders over the years. Lastly, you have a stock that is not trading at a ridiculous valuation.

Out of 2,813 stocks in my database, this stock currently ranks number 330. Make mine corned beef on rye!

At the time of publication Gunderson Capital Management was long HCN.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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