Just a few months ago, nobody wanted to touch real estate investment trusts, better known as REITs.
While REITs were a bastion of outperformance in the first half of 2016 thanks to prolonged low rates and rallying real estate prices, they became an unwelcome addition to most investors' portfolios in the second half of the year as market participants braced for higher interest rates from the Fed.
Because REITs are structured to pay out the majority of their income directly to investors in the form of dividends, these high-yield holdings are extremely sensitive to interest rates: when rates go up, the prices investors are willing to pay for yield through assets like REITs goes down. And sure enough, the Fed announced their second rate hike in as many years back in December.
Thing is, Wall Street got REITs wrong.
And after correcting for the last few months, the whole REIT industry has been back to outperforming as investors come to the realization that additional rate hikes are going to come at a snail's pace in this uncertainty-riddled market. That's creating a tradable opportunity for us this week, as some of the most popular REITs push into breakout territory.
To figure out which REITs have the best upside potential, we're turning to the charts for a technical look at five you should buy right now...
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Vornado Realty Trust
Up first on the list is Vornado Realty Trust (VNO - Get Report) , a $20 billion commercial REIT that's showing off a classic continuation setup in shares after rallying more than 20% off its November lows. Put simply, shares could be ready to kick off a second leg higher in February. Meanwhile, Vornado pays a 2.7% dividend yield at current levels.
The price setup in Vornado's chart is an ascending triangle pattern, a price setup that's formed by horizontal resistance up above shares and uptrending support to the downside. Basically, as this big REIT pinballs in between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through $108 - when that happens, we've got a new buy signal in this stock.
Vornado has an extra bit of bullish evidence coming from relative strength, the indicator at the bottom of its chart. Relative strength measures VNO's price performance versus the broader market, and the fact that the indicator has been in an uptrend of its own is a signal that this stock is primed to continue outperforming as long as that trend remains in play. Wait for $108 to get taken out before you jump into this trade.
Hospitality Properties Trust
We're seeing the exact same price pattern in another prominent REIT right now: Hospitality Properties Trust (HPT - Get Report) . Like Vornado, HPT has spent most of 2017 forming a textbook ascending triangle setup following a double-digit rally from November's lows. Now, a breakout above $32 is the signal that it's time to pull the trigger again on shares - in HPT's case, the breakout level to watch is resistance up at $32.
What makes $32 the key price level to watch here? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for HPT's shares themselves.
The $32 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $32 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Shares are within grabbing distance of breakout territory as I write; meanwhile, HPT pays out a massive 6.4% yield.
Retail Properties of America Inc.
Shopping center REIT Retail Properties of America (RPAI - Get Report) hasn't been a particularly lucrative holding for investors lately. Since peaking back in August, this mid-cap stock has shed more than 14% of its market value, underperforming the rest of the broad market by a big margin. That's the bad news. The good news is that shares look ready to kick off a reversal higher in February...
RPAI has spent the last several months forming a classic double bottom pattern, a reversal setup that looks just like it sounds. The double bottom is formed by a pair of swing lows that bottom out at approximately the same price level - those lows are separated by a price peak that identifies the breakout level that triggers the buy. For RPAI, that breakout level to watch is prior resistance up at $15.75.
Price momentum, measured by 14-day RSI, is the side-indicator to look at in Retail Properties of America. Our momentum gauge has made a series of higher lows during this stock's double bottom setup, a bullish divergence that indicates buyers are stepping in behind the scenes. Momentum is still secondary to price, however. Wait for shares to push through $15.75 before you click "buy" on this stock.
Gaming and Leisure Properties
$6.6 billion gambling REIT Gaming and Leisure Properties (GLPI - Get Report) is looking at a bullish reversal of its own right now. Shares have been under pressure since the end of the summer, pushes lower in a well-defined downtrend in the intervening months. Now, an even more tightly defined uptrending channel is kicking off - and it makes GLPI a "buy the dips stock" this February.
Gaming and Leisure Properties' recent uptrend is formed by a pair of parallel trendlines that have corralled this stock's price action stretching all the way back to November. Put simply, every test of the bottom of the price channel in this stock has given buyers a low-risk, high-reward opportunity to go long - and shares are closing in on another test of support this week. From here, it makes sense to buy the next bounce higher in GLPI.
Actually waiting for that bounce is important for two key reasons: it's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring GLPI can actually still catch a bid along that line before you put your money on shares.
Education Realty Trust
Last on our list of REIT breakouts is college housing REIT Education Realty Trust (EDR) . Education Realty has been carving out a long-term reversal - since the start of October, shares have been showing off a classic technical price pattern that signals exhaustion among sellers. Shares are finally within grabbing distance of breakout territory as I write...
The pattern in play for shares of Education Realty is an inverse head and shoulders pattern. The inverse head and shoulders is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through EDR's neckline at $42.
Remember to be reactionary with Education Realty Trust, or with any of the other potential breakout trades on our list that haven't crossed that threshold price just yet. Technical analysis is a risk-management tool, not a crystal ball - and EDR doesn't become a high-probability buy until shares can crack above the $42 price level. From there, the 50-day moving average becomes a logical place to park a protective stop.