Positioned for a Commercial Real Estate Bounce
Stock futures are up this morning, again. We'll see how the day plays out but remember that yesterday I wrote that the market will be taking direction from earnings reports out of tech giants Intel (Nasdaq: INTC) and Google (Nasdaq: GOOG) and financial behemoths Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM).
Well, we're two down and two to go – and the bottom line is that our suspicion that businesses are spending again is being confirmed and the banking environment is improving.
Intel easily beat earnings, indicating that tech spending (a major economic growth driver) is improving. But equally important, the company had great profit margins, showing that business efficiency may not reverse as growth picks up. That's a great sign for investors since many had feared that profit margins would come under pressure as companies begin to ramp up operations.
Intel brought in $10.3 billion in sales and $0.43 EPS. The semiconductor manufacturer was expected to earn $0.38 on $9.85 billion in revenue this quarter.
JPMorgan's profit rose to $3.3 billion from $2.1 billion last year. Tier 1 Capital was $130 billion or 11.5% of total assets. The bank also noted that bad debt related to mortgages was leveling off. We've seen similar improvements in many real estate related investments, but there are still weak spots in the sector.
***In sharp contrast to the positive news from JP Morgan and Intel, an article in the Wall Street Journal states that Morgan Stanley's Real Estate Funds business may lose $5.4 billion, or 61%, of its $8.8 billion real-estate fund. It appears that the fund completed almost $174 billion in deals since 1991, with investments from pension funds and college endowments funding projects in Tokyo, Europe, and Germany.
The roar in the heads of executives running this fund must have been intense as the commercial property bubble imploded in 2008. I've been on the wrong side of some investments, as has almost every investor, but the scale of this one is remarkable. This was a big fund, and the properties it owns can't simply be liquidated. If the fund walks away, the credibility of the Morgan Stanley brand is essentially wiped out.
It's hard to have the brass to start buying at the bottom, if you were also a buyer at the top. The interesting thing is, this type of situation is the precise opportunity most investors are looking for – an overheated investment that plummets to an irrational low, where it's almost a guaranteed good buy.
Credit will be due to Morgan Stanley if the firm pulls this one off. It looks as though the firm has brought back top executives from its European real-estate investing business and is moving ahead with new deals. If the commercial real estate sector rebounds, the fund should make money on these new investments, even as prior investments recover value.
This is the basic concept of averaging into positions, a subject matter I've discussed in Small Cap Investor Daily over the past week. While we would all love to buy a stock and see it go up immediately, that is rarely the case. Unless you're trading for short-term gains, it usually makes sense to average into a position, making at a minimum two share purchases.
***I think it's likely that we will see continued improvement in commercial real estate. The government has stepped in to help banks, as evidenced by JPMorgan's quarter, and those banks in turn should be helping to re-finance troubled commercial real estate properties. The owners of those properties, often referred to as REITS (Real Estate Investment Trusts), are seeing shares of their stocks move significantly.
This is still a speculative bet, but worth checking out. Bankruptcy, once thought to be a sure thing for REITS with beaten down property assets, is becoming much less likely.
For the moment, this is a big momentum play. And it is a bit risky, especially with the recent run-up in many REIT stock values. But there is enough profit potential so that Trademaster editor Jason Cimpl and I decided to put out a special report on this sector last week. If you're interested in checking out Jason's trading service and learning more about our four REIT selections, click here.
If you're not quite ready to sign up for a subscription service, it's still a good idea to follow the developing story in commercial real estate. A number of REITS are small-caps, and they tend to move in a group. We always want to be on the lookout for buying things when they are at depressed levels, and more and more it's appearing that commercial real estate is improving.
