This is the final installment in my series of articles on fairly valued mid-cap selections. My inspiration to produce these articles was at the request and suggestion from regular readers who were frustrated at the lack of coverage and/or articles on mid-caps. To accommodate those requests, I screened through the S&P 400 mid-cap index with the assumption that it represented a credible universe of high-quality mid-caps. The fact that I was only reviewing the S&P 400 index was missed based on many comments received on my previous articles in this series. In other words, I only included fairly valued research candidates that are members of the S&P 400 index in this series.
As I was reviewing this universe of mid-cap stocks, it became quite clear that there were more differences between individual mid-cap companies than there were similarities. Therefore, I organized the mid-cap research candidates into a series based on various industries and sectors. In part 1, I focused primarily on mid-cap stocks for growth. In part 2 I turned my focus towards dividend paying mid-caps. However, I broke part 2 into parts 2A and part 2B where I covered regional banks and Consumer Discretionary dividend growth stocks. In this final part 2C in this article series, I am presenting REITs and real estate oriented mid-caps.
Furthermore, it’s important to point out that my primary objective was to present a group of apparently fairly valued mid-caps based on a cursory screen. Therefore, I left it up to the reader to conduct their own comprehensive research and due diligence on any of these research candidates that appeal to them. To clarify further, throughout this series I am not suggesting that these are the best mid-cap stocks to invest in. Instead, I endeavor to present mid-cap selections from the S&P 400 index that currently appear attractively valued.
To summarize, just as it is with every other equity class, there are many different types of mid-size companies with each possessing different features and characteristics. For example, the mid-cap universe contains many intriguing growth opportunities. On the other hand, the mid-cap universe also contains dividend-paying companies of all categories. Investors can find high-yielding mid-caps, moderate-yielding above-average growing mid-caps, and everything in between. Simply stated, not all mid-caps are the same. The real estate oriented research candidates presented below come in all the flavors mentioned above.
Real Estate Investments and the Liquidity Factor
The two most dominant forms or choices for equity investors are stocks and real estate. Equity investing is also referred to as ownership versus investing in debt instruments often referred to as loaner-ship. In other words, equity investors position themselves as owners of the asset they are investing in. In contrast, investing in debt instruments is mostly associated with a guaranteed or consistent income stream in the form of interest payments. However, debt instruments typically do not afford the opportunity to participate in growth or gain in excess of your original investment. On the other hand, although equity investing implies participating in potential gains, it is also more exposed to participating in potential losses. These factors represent the primary difference between equity investing versus debt investing.
In regards to the two major equity classes, real estate or stocks, the primary differentiator has traditionally been liquidity. Common stocks are publicly traded on stock exchanges and therefore readily liquid. In contrast, real estate typically requires a significant effort and time in order to complete a sale. In other words, real estate is generally not considered a liquid investment class.
Furthermore, liquidity can be either a positive or negative attribute. On the positive side, if you need to raise cash for any reason, the liquidity provided with stock ownership easily facilitates that need. Moreover, depending on how much cash you need, you might only be required to sell a small portion of your holdings. However, if for example you are invested in a rental property such as a house, you cannot simply sell the kitchen and keep the rest of the house. If you need cash out of an investment, you are forced to sell the entire asset. Under these circumstances, liquidity is a positive for stocks and a negative with real estate.
On the other hand, liquidity can also be a significant negative. With the liquidity provided with stocks, you might need cash during a bear market and consequently be forced to sell your asset for less than it’s worth. Or worse yet, a bear market can incite panic in the investor’s mind causing them to sell their asset at a loss simply because they have become frightened. In contrast, the time and effort required to sell a piece of real estate may save the investor from making such a mistake. In that case, real estate’s lack of liquidity can be a real benefit.
Legendary investor Warren Buffett explains the liquidity factor far better and in a much more entertaining fashion than I. Warren is comparing two illiquid real estate investments he made in the early 1990s to his experience in owning stocks. The following excerpt from his 2013 letter to shareholders summarizes and clarifies what I said above:
“There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate. It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is.
After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.