Simon Property Group (SPG)
From Cabot Wealth Advisory 1/20/14 Sign up for Cabot Wealth Advisory—it's free!
This investment idea is based on the thesis that as more and more commerce migrates to the Internet, traditional shopping malls will lose business.
Thus the Internet is the disrupter, and the victims of this disruption will be the big shopping mall operators, like Simon Property Group (SPG), which I chose because it runs the two malls closest to my house AND because multiple aspects of its charts show a stock that’s subtly shifting from a major uptrend to a major downtrend.
In other words, investors are slowly moving to greener pastures.
Fundamentally, all seems well with Simon, which is the largest Real Estate Investment Trust (REIT) in the U.S. The company had $1.3 billion in revenue in the third quarter year, and a plump after-tax profit margin of 24.0%. Analysts expect earnings to grow 10% in 2013 and 8% in 2014.
Debt is 391% of equity, which looks high but is common for a real estate business. And the quarterly dividend amounts to 3.1% annually.
But the stock is rolling over!
Exhibit number one is the Relative Performance (RP) Line, which peaked in July 2012. Since then, the stock has been underperforming the broad market. In fact, the RP Line hit a new in November.
Exhibit number two is the stock’s price, which peaked at 182 in May 2103, and fell as low as 142 in September.
Exhibit three is the rebound since then (in an extremely supportive environment), which has taken the stock precisely up to its downtrending 200-day moving average. Technically, that can be a great inflection point.
If all the news is good, why are investors selling?
Some investors may be worried (at least one Cabot analyst is) that as more and more of us elect to have UPS and FedEx deliver our packages—not to mention Amazon and its forthcoming drones—business at the company’s malls will suffer.
(My wife, for one, is leading the way. While she did a lot of holiday shopping, the bulk of it was online—and not once did she set foot in a mall.)
Some investors may be selling to move into more growth-oriented stocks.
And some investors may be selling because they’re afraid rising borrowing costs will hurt the business. Conventional-thinking investors spend a lot of time thinking about interest rates, so this is often a factor in the movement of REITS.
In any event, the stock is sending a message, and the reasons for that message are likely to become clearer as the months pass—and maybe sooner, because SPG will announce fourth-quarter earnings before the market opens on January 31.
So how do you play this investment?
You could sell short right here. If you own the stock, and you’re enjoying the dividends, you could buy puts. Or you could do nothing. Earnings releases frequently precipitate sharp moves by stocks, and we generally avoid entering positions just before earnings announcements.
Note: if you are looking to get regular income like SPG’s 3.1% dividend, and you’d like the opportunity for capital appreciation as well, I recommend our newest advisory, which was designed just for that purpose. Cabot Dividend Investor is for the investor preparing for—or in—retirement, who wants a healthy and growing flow of dividend income. Take a look here!
|Simon Property Group (SPG)
225 West Washington Street
Indianapolis, Indiana 46204
Index Membership: N/A
Industry: REIT - Retail
Full Time Employees: 3,400