Analysts jumped on this stock ahead of earnings; the markets love it

Wall Street analysts talk to each other about where a stock should or could head soon, especially as earnings season begins, as their reputations often depend on the strength of their forecasts and projections for valuing a stock. Today, most of the biggest names on Wall Street have snapped up a real estate stock.

The Federal Reserve (Fed) has informed markets of potential interest rate cuts for 2024 and the FedWatch tool ECM Group NYSE:ECM suggests that these rates will likely hit the market in May rather than March this year.

These analysts have identified a potential shift in the sector, which will affect some names better than others. One of these names is Simon real estate group NYSE: GSP.

Bears had deemed real estate trading space an unnecessary location now that most trading occurs online via platforms such as Amazon.com Inc. NASDAQ:AMZN AND Shopify Inc. NYSE: BUY. Simon Property (which owns shopping centers) has seen its price fall by up to 50% from its high of $170 per share in 2021. Today the story changes.

Mechanics in play

A resilient wave of discretionary consumer spending has allowed Simon Property Group properties to skyrocket.

But don’t just take the consumer’s word for it; here are some KPIs (key performance indicators) that investors look for in real estate.

One of these is occupancy, as it provides insight into the demand trends that properties are experiencing today.

For Simon, this amounted to 95.2% in the latest quarter, compared to 94.5% a year earlier. Second, FFO (funds from operations) is the equity equivalent of earnings per share for these REITs.

This metric is also up 9.2% over the past 12 months, interesting growth for a stock that operates in an industry that historically doesn’t tend to attract much growth, but rather a “slow and steady” approach to these numbers.

The “cap rate,” used for real estate dividend yields, can give you a lot of information about how a property is valued in the market compared to historical norms. You can measure this by looking at Simon’s 5.5% dividend yield, which beats the U.S. inflation rate and is higher than the 3.9% risk-free yield on 10-year Treasuries.

Compared to the wider one Vanguard Real Estate ETF NYSEARCA: VNQ, this is an attractive deal, considering the rest of the REITs pay a 3.8% dividend. Only America’s favorite REIT, Real estate income NYSE:O, comes close by offering shareholders a 5.7% yield. However, there are many better factors missing that Simon has not overlooked.

Value in plain sight

Simon Property shares are trading 94% of its 52-week high, meaning traders have been rewarding this stock with bullish momentum lately. At the same time, Realty Income is priced at 78% of its 52-week high, which fits Wall Street’s definition of a bear market (a decline of 20% or more from its 52-week highs).

Because mall valuations can depend on how much revenue and ancillary income they generate, investors and analysts focusing on the sector have identified a long-term trend that is here to stay and has been picking up stock action lately to push it higher .

Understanding that when you buy a REIT, your returns come from the appreciation of the equity capital in the portfolio, here’s a big clue. Simon takes the top spot based on price-to-book ratio, or how much markets are willing to pay today for a stock’s underlying equity value.

Realty Income shares have a P/B multiple of 1.2x, which aligns with most of the industry average. In Simon’s case, markets have priced the stock at 13.5x P/B, and it has to be expensive for a reason. The reason is simple: profits are growing at above-average rates and analysts have noticed it.

TO The Goldman Sachs Group NYSE:GSAnalysts raised their price target for the stock to $161.0 per share, implying a 16.6% upside from today’s prices. Piper Sandler New York Stock Exchange: PIPR followed suit with its push to $172 per share, pushing for a 24.6% jump from where the stock trades today.

Before you consider CME Group, you’ll want to hear this.

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