Key points
- Real estate has been the worst this year, but not all industries are created equal.
- Logistics and warehousing may be needed during the new manufacturing explosion in the United States, when Prologis shares shine.
- Valuations show it as a preferred name with double-digit upside for its shareholders.
- 5 stocks we prefer to Prologis
US real estate has been one of the worst-performing spaces over the past 12 months. The Vanguard Real Estate ETF NYSEARCA: VNQ during this period it lagged the broader S&P 500 index by as much as 24%. Despite some signs of recovery in the construction sector, this may not be until this value reaches the real estate investment trust (REIT) level, where property values will suffer.
Blackstone’s $10 billion bet on residential construction could spell a turning point in sentiment in the sector. However, they matter more money than God, so they can afford to wait as long as necessary. Retail investors may not have much time and require relatively quicker profits, which is why a specific real estate brand may be the perfect choice.
A logistics and warehousing boom could soon begin in the United States Prologis Inc. NYSE:PLD it’s at the front of this wave. Operating exclusively in logistics warehouses and other similar real estate, the stock could be well positioned to outperform the real estate sector as a whole, or at least that’s what the markets are betting on.
The economic boost for logistics
Now that the US manufacturing sector is starting to awaken, according to the trends of the ISM manufacturing PMI index, many industries will have to rely on a strong logistics network.
Pushing its first expansion reading after a 16-month contraction, the manufacturing sector could be top of mind among investors and professional traders. Analysts at The Goldman Sachs Group Inc. NYSE:GS called for a turnaround in the manufacturing sector within this 2024 macroeconomic outlook report.
A lower dollar index could be in play with potential interest rate cuts by the Federal Reserve (Fed). A cheaper dollar makes American exports more attractive to cheaper nations. However, the United States can only export what is in stock, so production must begin. Connecting the dots would be impossible without two specific industries: trucking and logistics. Therefore, Prologis is rewarded compared to other real estate, including residential and healthcare properties.
Spreading Real Estate Valuations: Prologis is King
Comparing valuations with worthy REIT mentions can help investors gauge current sentiment towards Prologis. To do this, use the forward price-to-earnings (P/E) ratio, as it attempts to place a value today on tomorrow’s expected earnings.
Prologis shares trade at a forward P/E of 19.3x, 32% above the REIT industry average. Specifically, it outperforms one of the biggest names in the residential sector by 24%. Residential equity NYSE: EQR. This could mean that markets believe logistics valuations (and profits) will pay off before any value reaches the residential sector.
How about something less cyclical, like health properties? Within basic consumer services, places like hospitals and clinics should have no ties to the underlying economic cycle, ensuring safety in these times of rising VIX. However, markets believe Prologis is worth more Healthpeak Properties Inc. NYSE:DOC, valued at just 9.3x forward P/E, a 51% discount to Prologis. Price action plays a role here, as Healthpeak shares are trading 72% off its 52-week high, while Prologis has hit 87% in bullish momentum.
Wall Street’s View on Prologis
Starting with price targets, Wall Street analysts see a consensus rating of $141.7 for Prologis, nearly 20% higher than today’s prices. This is an extremely bullish assumption, considering that real estate is a low beta sector, meaning it doesn’t move much. Compare this to Equity Residential’s 6% upside through its $65.3 price target and Healthpeak’s 5% downside as analysts set a $17.7 price target.
Additionally, Prologis offers investors the added benefit of a 3.2% dividend. While it barely beats U.S. inflation rates and is more than 1% below the 10-year Treasury yield, the trade-off comes in how much upside the stock promises today. The bears also decided to let it go. Short interest in Prologis stock is extremely low. Only 1.1% of all stocks are short, leaving the stock dominated by mostly bullish participants.
To top it off, the stock is 93.5% owned by institutions, a sign that pension funds and other respectable money managers find a reasonably stable investment in this stock.
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