Monday, September 14, 2009

Barron's Bearish on Realty Income

Well I guess everyone is entitled to their opinion. This explains why the sudden sell off early this morning...

Barron's released a bearish article about Realty Income. Interesting how the stock was bought back strongly at the end of the day by the institutional buyers. Apparently they (the smart money) were not fooled by Barron's Bearish take on 'O'. I wouldn't be surprised if they had some short action in on O this morning. By the looks of the short squeeze (run up back on the price during the day) they created when shorts were covered during the day.

Ah, but that is mere speculation. Let's look at the fundamentals and facts - where in my opinion I respectfully disagree with Barron's article:
  1. Realty Income has a 40-year track record of level or rising dividends. Two words: Impressive and experience.
  2. Realty Income builds in a margin of safety as taught by investing greats Benjamin Graham and Warren Buffett in two ways: First, into its sale-leaseback transactions with retailers by purchasing its tenants' most profitable stores. This ensures that they will still be able to cover rent payments with cash, even if store performance deteriorates. Second, they carry a large buffer of cash to make dividend payments if a short-term cash flow problem ever did arise.
  3. Unlike their competitors (who derive property values from store profitability) Realty Income takes care to pay no more for real estate than those individual properties are worth, so if a property does go vacant they can re-lease or sell it without taking a big hit.
  4. Realty Income has an average of 4% of its total rental revenue up for renewal annually over the next five years, which should provide some protection if rents fall over the near term. The other 96% has built-in rent bump increases tied to inflation.
  5. Realty Income is overvalued? Maybe, or maybe not that's a tough call. Historically it has commanded a higher P/E ratio value over other comparable REIT's due to the quality of the company.
  6. Insiders get paid from the sale of company stock and stock options all the time. The CEO selling 20% of his stake is more likely due to the overall market coming back 48% from the March lows. He's probably worried the market will correct (and take 'O' down with it and so he's taking some off the table.
Near Term Trading Outlook
We might see increased volatility and selling that pushes the price back down to the $24 suport range in the next few days. In my mind that would be a good opportunity to sell Oct $22.50 Puts which would be out of the money and well below support.

No comments:

Post a Comment