Positioning for Inflection

As we close in on the end of 2016, REIT stocks are in a sort of purgatory where trading is not based on fundamentals, and perhaps for rational reasons.  Tax loss selling and holding of positions to defer gains until 2017 are viable reasons to sell losers and hang on to winners.  Once the calendar rolls over, we believe some of the fundamentally strong stocks which have been losers in the market can begin to turn it around.

One such stock is Omega Healthcare (OHI).  We increased the position to about 6% this week because its valuation simply does not make sense for its quality.  At roughly 9X 2017 estimated FFO, it is priced among the cheapest REITs, yet its characteristics are nearly blue-chip.  Between an investment grade balance sheet and a large asset portfolio diversified geographically and by tenant, OHI should have the stability to deal with whatever changes happen to healthcare reimbursement and regulation.

We suspect the changes will actually be a catalyst for OHI as it will remove the apprehension.  Most stocks with a long track record of consistent dividend growth trade at premiums to the average REIT multiple, so OHI has room for significant price appreciation.

There may be some volatility in the coming week as the extremely low trading volume of the holiday season can remove the floor from small cap names.  We will be at our desks ready to scoop up opportunity if things get cheap.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

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