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While real estate investment trusts (REITs) are one of our favorite income investments, they are not all created equal. Owning the wrong REITs could be dangerous for many growth investors, especially those in the telecommunication and data sectors.
Let me explain...
REITs were on fire in 2019. In fact, many of them delivered total returns above 50%.
And now that the U.S. Federal Reserve has taken interest rates to historic lows under 2%, REITs continue to surge.
But here's the problem.
REITs are typically bought in pursuit of a high yield. It's a safety for income investors when the Fed does them no favors.
Lately, REITs in the telecommunication and data sectors have ripped higher on earnings growth. And growth investors are having at them, too.
So these investments are hot. But tempting as it is to buy any REIT that looks "hot" right now, it's always important to look twice at the underlying financials.
Many growth investors have ignored this, driving these REIT prices up 35%, 50%, and even 60% on sentiment. That performance isn't going to last for some REITs.
But lucky for you, we know which REITs are going to fall first.
Our top REIT for 2020 could climb to five times its current price, and shares yield a solid 7.9%. Click here to get the Best REIT to Buy for 2020…
So if you're holding any of these telecom or data REITs, drop them immediately. And if you're watching them, run away...
Why Telecom and Data REITs Are the Worst of the Bunch
Thanks to exponential growth in cloud computing and the launch of 5G, telecommunication REITs had some of the best returns in the space last year.
But that was last year. Past returns are not indicative of future growth.
Stripped of earnings acceleration, these telecommunication and data REITs don't look all that attractive.
With paltry yields, there is nothing supporting the underlying valuation.
Sure, there are retail REITs that have structural issues of industry decline, but that risk is mostly compensated by offering extremely high yields.
That's not the case with these telecommunication and data REITs.
At some point, the music is going to stop. That moment may come in 2020, when most analysts see earnings growth for telecommunication and data REITs slowing dramatically.
The time to sell is now, while most should still be able to lock in their earnings.
The Worst REITs to Own, No. 3
The name of the game in telecommunications is owning cell towers. One of the largest REITs in the market, with a $62.5 billion market cap, is Crown Castle International (NYSE: CCI).
The company focuses exclusively on the U.S. telecommunications market. Shares outpaced the market in the last year with a more than 35% gain.
Those gains have pushed the valuation to dot-com-crazy levels. Shares trade for more than 74 times 2019 estimated earnings. In 2020, earnings growth for Crown slowed to less than 20%.
Paying a dividend of 3.2% is not nearly enough to compensate for a potential valuation contraction. Sell Crown immediately.
The Worst REITs to Own, No. 2
An even bigger player in the cell tower game is American Tower Corp. (NYSE: AMT). With international exposure, American Tower is leveraged to the global growth story.
Shares jumped nearly 50% over the last year thanks to the rollout of 5G. Gains pushed American Tower to a valuation of almost 60 times 2019 estimated earnings. Profits are expected to slow to less than 15% this year.
American Tower pays a dividend of only 1.6%. Without earnings growth, there is little to support the stock at these levels.
I'd lock in those 50% gains or more before the investors wake up to the reality of lower future growth.
But this one is portfolio poison...
The Worst REITs to Own, No. 1
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Cloud computing is the real deal. Just ask Microsoft and Amazon. The expansion to the cloud benefited data REIT Equinix Inc. (NASDAQ: EQIX) to the tune of 60% in the last year.
It's not likely it can repeat that performance.
Analysts expect the company to grow profits by 28% in 2020. That sounds juicy, but considering the stock is trading for almost 100 times 2019 estimated earnings, not so much.
The company pays a measly dividend of 1.65%. So the dividend is not why investors are buying this stock.
To the extent earnings fall short of expectations, this one could fall far. Sell immediately.
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