Besides, buying land usually requires tens or hundreds of thousands of dollars up front, which isn’t feasible for many would-be owners — especially in this highly unaffordable market.
However, there’s an easy way to invest in real estate without breaking the bank or even leaving the couch: buying real-estate stocks, which BMO Capital Markets finds increasingly attractive.
Real estate will rebound after getting unfairly punished
Although property price gains have been significant and widespread this year, the same can’t be said for real-estate stocks. The group has been a bitter disappointment, as it’s the only S&P 500 sector in negative territory in 2024 — down 7.6% versus an 8.8% gain for the index.
That poor performance isn’t a reason to shy away from the sector, according to BMO. In fact, investment strategy chief Brian Belski recently wrote that the group’s lackluster showing is a counterintuitive reason to be more constructive.
“We have viewed recent performance trends from a contrarian standpoint and believe the sector is poised for a turnaround in the coming months and are recommending that investors use its current weakness as a dip buying opportunity,” Belski wrote in a May 7 note.
While the Montreal-based bank doesn’t officially have a bullish overweight rating on real estate, Belski thinks investors should consider adding selective exposure to the group since sentiment has gotten too sour. The market-weight sector is oversold on a valuation basis, he noted.
BMO Capital Markets
When real estate has been beaten down this far in the past on a relative basis, it’s sprung back and outperformed the S&P 500 by 17% in the following 12 months, the strategy chief found.
“If historical performance patterns are any sort of guide, it could be an opportune time for investors to consider adding exposure within portfolios,” Belski wrote.
Much of the concerns about real estate is related to interest rates, which are now expected to stay higher for longer with few, if any, cuts coming this year.
But, contrary to what many investors believe, higher rates don’t always hurt real-estate stocks, Belski wrote. He found that there’s not much of a correlation between the sector’s performance and changes in rates, and while he did acknowledge that the group tends to do better when rates fall, they have also outperformed when rates slowly climb.
The market’s misleading narrative about real-estate stocks has made the group remarkably cheap relative to its solid fundamentals, in Belski’s view.
BMO Capital Markets
Analysts’ earnings revisions for the sector are unusually low relative to the S&P 500, according to BMO, so those stocks can take off if next quarter’s results clear an unambitious bar. Another tailwind are free-cash-flow yields, which have been on the upswing lately.
“The severity of underperformance appears mismatched with the fundamental underpinnings of the group,” Belski wrote. He added: “In other words, a lot of bad news is already priced into these stocks.”
13 real-estate stocks set to outperform
Investors looking to diversify their portfolios should consider 13 stocks in the real-estate sector with outperform ratings from BMO Capital Markets. Along with each company is its ticker, market capitalization, and price-to-earnings (P/E) ratio.
