I’m not a fan of mass media. To me, it’s become more infotainment than information… And it’s easy to see why.
News organizations make money by selling ads. If no one sees them, they don’t get paid. And human beings are far more entertained by bad news stories than good ones. Hence there’s no shortage of dour subjects in the news – especially financial news…
What’s worse is, most investors don’t know how to ignore this bad news and focus on their long-term plan. It’s so tempting to take money off the table when a crisis hits. But doing so can be expensive…
Take a look at the chart below. I plotted every major “market crisis” of the last 11 years on a chart of the S&P 500. Notice anything?
If you’d gotten spooked out of your stocks by listening to the mass media, it would have cost you dearly. Through all the bad news, the S&P 500 is still up 300% over the course of this bull run.
Here’s why I’m telling you this…
Last week, the S&P 500 got rocked intraday by the latest crisis du jour: Biden’s new tax policy.
The proposal is a potential capital gains tax rate of nearly 40%, for households making more than $1 million per year. This spooked some shortsighted investors out of the market, causing the index to fall 1%. (Note that the S&P 500 has since recovered all those losses and then some.)
Maybe Biden’s higher tax rate makes it through Congress and becomes law. Maybe it doesn’t. But either way, it doesn’t mean you should sell all your stocks and prepare for a bear market. As a matter of fact, doing that would create a taxable event… Potentially subjecting you to the tax increase that spooked you in the first place!
Instead, I like to think of these events not as catalysts for a crisis, but as opportunities to look where other investors might not be…
So when I looked at my data after that news dropped, I learned how the Big Money is reacting. (Regular readers will know the Big Money is the major institutions and hedge funds of Wall Street.)
And it’s not by selling all their stocks. Instead, they’re loading up on a specific sector that could act as a shield to this new tax policy…
The Big Money’s Tax Shield
Right now, real estate is being gobbled up by Big Money investors – especially real estate investment trusts (REITs). These companies are investment vehicles for real estate… A way to get exposure to a strong real estate market without owning any actual property.
And they tend to pay hefty dividends. The 220 REITs that I track pay out an average of 3.95% per quarter.
If capital gains taxes go up, dividends might see a tax raise, too… But a majority of REIT dividends are already taxed as ordinary income. So REITs will escape this potential penalty (which, again, hasn’t even hit the chambers of Congress yet).
Clearly the Big Money is thinking along these lines. Of all the buy signals my system flagged last week, 38% of them were in the real estate sector. Real estate also had the fewest number of sell signals that week of any other sector, at just 2%. That made it the strongest-ranked sector in the market according to my process.
And it makes sense that Big Money is moving into REITs…
Legally, real estate stocks organized as REITs are required to pay out a minimum of 90% of taxable earnings. That’s what often makes the yields so enticing.
Add that to the fact that the U.S. is vaccinating quickly. A fully reopened economy is just around the bend. REITs should benefit, especially the commercial and retail REITs that were beaten to near-death levels last year. Now add the tailwind of being a potential haven from scary tax reform… And we get a nice setup.
Investors could benefit from buying the overall sector through an ETF like the iShares U.S. Real Estate ETF (IYR). The recent strength of IYR suggests this trend is in full swing. Especially with Big Money buying…
Now, IYR is a solid investment. But keep in mind, it follows the Dow Jones U.S. Real Estate Index, which has nearly 100 holdings. It’s highly diversified with large- and mid-cap sized companies.
Broad-based exposure is fine and all, and it has its place in a conservative long-term portfolio. But in order to really benefit from this trend, you have to find the outliers.
Regular readers know that outliers are what I call the 4% of stocks that accounted for 100% of the gains of the S&P 500 for 100 years. (The other 96% matched the performance of Treasury bills, or did worse.)
If you want to not only outperform the market, but crush it, you want to be in that 4%. Otherwise, you have a 96% chance of losing out to boring old bonds.
That statistic essentially says: stock picking is really, really hard.
But when a process is in place to identify the companies with the best setup in terms of growing sales, earnings, and profits… the cream reveals itself. And the cream always rises to the top.
How to Find the Next Real Estate Outlier
I showed you above that the real estate sector is currently the strongest in terms of fundamentals and technicals – that’s why Big Money is rushing in.
But my entire investing strategy’s focus is uncovering outliers within these hot sectors. And it’s done very well for me and my readers over the past few years. We’ve enjoyed peak gains as high as 1,000%, and a win rate as high as 90% using this strategy.
To help me discover the strongest stocks in the market, I use a 0–100 ranking score on each one. To determine that score, I look at tons of metrics – like sales, earnings, profits, debt, and Big Money buying pressure.
The 127 institutionally tradeable stocks that I track in the real estate sector have an aggregate overall score of 66.5. That’s pretty good. But what If we focused on a basket of only the 10 strongest-scoring stocks?
The top 10 stocks of the 127 have an aggregate score of 80.2 out of 100. The bottom 10, on the contrary, score an average of 48.5.
IYR had a respectable one-year compound performance, including reinvested dividends, of 32.6%. But compared to the basket of 10 outliers, it looks silly. The outlier basket had a one-year return of 72%. That’s more than two times the return!
In other words, not every individual stock in the real estate sector is going to thrive in this environment. And while IYR is a simple and safe way to get exposure, it’s nowhere near the best way.
To get the best returns, you want to be in the outliers. And to find them, you want to look out for stocks with growing sales and earnings and manageably low debt at a minimum.
Keeping your investments in stocks with these factors is a good start. It’s important to corral your capital into profitable and growing companies.
Now, following the Big Money… that’s not quite as easy.
My process uses 100% publicly available data, but I’ve spent well over a decade engineering it to churn out the most profitable opportunities the market has to offer.
It’s like being a fly on the wall during meetings between the world’s most powerful investors. And with multiple 100% winners and an average open portfolio return of 68%, it’s almost never led me and my readers astray.
I recently put on a presentation with your editor, Jeff Brown, about how this system works and its tendency for finding outlier stocks. And as part of the presentation, I delivered five ideas that my system identified. Just go here to learn more…
Editor, Outlier Investor