“We play today, we win today, dassit.” – Mariano Duncan, New York Yankees, 1996
Duncan coined the phrase in the summer of ’96, which became the unofficial team slogan for the first World Series Championship in the Bronx since 1978. As Bob Klapisch wrote in Champions!: The Saga of the of the 1996 New York Yankees, the credo represented the Yankees’ uncomplicated, selfless approach to baseball that year. Just play, and do whatever it takes to win, including taking a back seat at the individual level at times.
Sitting here at the beginning of April, I have been pondering how to help Hedgeye clients win on the REIT side. In the end, I think it comes down to keeping things simple, not overthinking it, and following the #PROCESS..
Well, here we are. Time for some #Quad 4 in Q2 action!
Throughout the first quarter, we were peppered with questions such as “why are REITs behaving this way with Quad 4 on the way?” The answer at the time was “I don’t know,” just that Keith’s signals told us to get out of the XLRE, and as a firm we did just that. Smart move, as it turns out it was full on #Quad 3 in the first quarter and anything rate-sensitive got smoked along the way, including REITs, as rates spiked.
At the same time, we moved our position monitor incrementally into longer duration, larger-cap, quality, and lower leverage… basically a gradual repositioning ahead of a #Quad 4 environment where we can at least deliver relative outperformance on the long side. That may be the best we can do for a time.
Fast-forward to now. We want to again take another look at our positioning, vis-à-vis where we have been and where we are likely going from here.
We have been long Apartments (AVB, EQR), Industrial (PLD, REXR), Triple-Net (O, NNN, and to some extent RADI) and one Gateway Office name (PGRE). At the same time, we have recommended shorting commodity-linked industrial (COLD), self-storage (UHAL) and Timber (WY). Not too bad as can be seen below, with the exception of Industrial which has been offsides.
That could be changing, however…
Now that we are staring Quad 4 dead in the eye, we believe strongly that it is time to remind investors of the best- and worst-performing subsectors in REITs in a Quad 4, subject to the SIGNALS as always of course.
We have spoken about this before, but historically the Towers, Data Centers, Triple-Net, Industrial and Healthcare have been among the best-performing subsectors with the highest “batting averages,” owing in large part to longer-duration leases, fairly predictable earnings and cash flow streams and the “criticality” of their operations versus shorter-duration REITs with more operating leverage.
We feel good about the way our position monitor is setup here, and will not be making any changes for now.
Speaking of the SIGNALS, Paramount Group (PGRE) and Prologis (PLD) are among Keith’s top SIGNAL STRENGTH stocks, and we are pounding the table here on PLD as a must-own both ahead of 1Q22 results next week and in general throughout 2022. It is a consensus long and likely over-owned, but we are certain that upward earnings revisions are forthcoming into a period when expectations broadly will likely be revised down. Also, stay long of AVB into Q4. Trust the #PROCESS.
There will be a time to move back in to higher-beta names, but today is not that day.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 2.18-2.48% (bullish)
High Yield (HYG) 80.29-82.83 (bearish)
SPX 4 (bearish)
NASDAQ 13,605-14,635 (bearish)
RUT 1 (bearish)
Tech (XLK) 148-164 (bearish)
Energy (XLE) 73.55-78.88 (bullish)
Gold Miners (GDX) 36.99-40.10 (bullish)
Utilities (XLU) 71.21-76.32 (bullish)
Shanghai Comp 3170-3310 (bearish)
Nikkei 26,826-28,707 (bullish)
DAX 14,011-14,814 (bearish)
VIX 18.01-26.48 (bullish)
USD 97.84-99.50 (bullish)
Oil (WTI) 96.12-116.22 (bullish)
Nat Gas 4.71-5.96 (bullish)
Gold 1 (bullish)
Copper 4.57-4.83 (bullish)
Silver 24..32-25.98 (bullish)
Good Luck Out There Today.
Rob Simone, CFA
