Bargains in the REIT Wreckage
After a terrible 2008, real estate investment trusts are having an awful 2009. The SPDR Dow Jones Wilshire REIT (RWR) exchange-traded fund, which tracks 82 REITs, has dropped 35% after plunging about 45% in 2008. On Mar. 19, Moody's (MCO) downgraded General Growth Properties (GGP) to "C," its lowest rating above default, prompting another wave of selling.
Amid the wreckage, Jay Leupp, manager of the Grubb & Ellis AGA Realty Income Fund (GBEIX), sees bargains. He's buying selected REIT stocks and preferred issues carrying yields that top 10%. Among REITS that own apartments, his funds bought BRE Properties (BRE)' C-series of preferred shares, yielding 12%, and Associated Estates Realty (AECPRB)'s B-series, yielding 15%-plus. The apartment business "isn't recession-proof...but it's recession-resistant," he says. Other picks: the common and Z-series preferred shares of Public Storage (PSA), the leading owner of self-storage facilities. Its cash flow is more than three times what's needed to cover fixed charges, says Leupp.
With consumer spending down, shares of retailers and clothing makers have been clobbered. On Mar. 24, Williams-Sonoma (WSM) announced that fourth-quarter profit sank 90%. That followed news from Tiffany (TIF) that fourth-quarter earnings fell 76%. "Consumer discretionary stocks have sold off as much as financials," says Jeanie Wyatt, CEO of South Texas Money Management. "We had irrational pessimism." She's scouting for companies that have done well in previous recessions and can gain as consumers trade down to cheaper price points and entertain more at home. She likes Williams-Sonoma, which owns Pottery Barn and West Elm, and whose shares, at 11, are off 56% over the past 12 months. That 90% profit drop included restructuring charges and other one-time events, her equity research director Fred Labatt says, and operating earnings shot past expectations. (Shares closed flat the day of the announcement.) Wyatt is also keen on apparel maker VF (VFC), whose brands include Wrangler and North Face. Shares, at 59, are down 25% for the past 12 months.
Mutual Fund Expenses Head North
In a regulatory filing on Mar. 19, Vanguard Group said it is raising the expense ratio on its Vanguard Wellington (VWELX) fund from 0.27% of assets to 0.35% for retail investors. Costs will rise across the industry, Morningstar (MORN) says, as falling stock prices and massive fund outflows have economies of scale working in reverse. Owners of research-heavy international funds may feel higher costs the most. If your international fund has expenses above the average of 1.02%, Morningstar's Dan Culloton suggests switching to cheaper funds with good long-term performance such as Dodge & Cox International (DODFX) (0.64%) and EuroPacific Growth (AEPGX) (0.79%). Among exchange-traded funds, Vanguard Europe Pacific (VEA) (0.12%) is a low-cost option.