Two Real Estate Stocks with 30%-Plus Potential

The real estate sector is showing bullish signs in the stock market. For those wanting to bet on a housing recovery without becoming a landlord, this type of investment may be the perfect way to play the real estate sector.

And I think right now may be the perfect time to add real estate exposure to a portfolio…

Housing feels like a bear market bottom. As stocks bottom, the news is generally positive and sentiment is fairly negative. That’s what we’re seeing in real estate today.

#-ad_banner-#Real estate news continues to get “less bad.” Last week, the National Association of Realtors said that home sales rose, inventory fell, and prices only dropped 2% from a year ago. These are all signs that the worst of the housing decline could be behind us. Yet sentiment in real estate is mostly bearish.

That’s usually the best time buy investments at bargain prices… when news is getting better and sentiment is bearish.

In real estate, sentiment is a useful contrarian indicator, but investors should also pay attention to what people do with their money. That’s why I use the 26-week rate of change (ROC) to spot potential investments. ROC measures how fast different stocks or funds are moving higher. Over the long-term, the fastest movers have been among the biggest winners.

Here are two real estate stocks my ROC system is signaling to buy…

American Capital Agency Corp. (AGNC) invests in residential mortgages and passes the interest payments on to its share holders. They use leverage, but they seem to have managed to do well in this market. AGNC has a dividend yield of about 18.2%. If home prices stabilize and foreclosures can be completed in an orderly fashion, AGNC could be a big winner.

The chart below shows that ROC has just recently broken above 0. The last time AGNC gave a buy signal like that, the ETF delivered a total return of about 33% from July 2010 to the sell signal when ROC fell below 0 in June 2011. This beat the S&P 500 which was up about 25% over that same time.

 

AGNC has just broken above resistance and completed a rounding bottom pattern. Based on the price pattern, a price target of about $34 can be set for the stock, and a total return of more than 30% over the next year is possible if the dividend remains unchanged.

A bottom in housing would probably indicate the economic recovery is on track and that could boost commercial real estate as well. Traders can diversify with a REIT specializing in commercial real estate and Crexus Investment Corp. (CXS) is also a buy based on the ROC. CXS is managed by a subsidiary of Annaly Capital Management, Inc. (NLY), a REIT specializing in mortgage-backed securities that has a great long-term track record.

The yield of 12.3% supports a total return target of 30% in CXS over the next year, if the dividend remains unchanged. CXS reported that it was not using any leverage at the end of last quarter. That means CXS can add more  income generating properties to their portfolio if they decide to use leverage.

 

Both of these REITs have low volatility compared to the stock market in general and could make good investments for income investors.

In my 26-week ROC strategy, we also have a REIT among the strongest ETF investments. The portfolio for that strategy is unchanged this week and will continue to hold Vanguard REIT (VNQ), SPDR S&P 500 ETF (SPY) and Vanguard Small-Cap ETF (VB).