Industry representatives say that FFO is more reflective of a REIT’s health. For the purposes of determining the future direction of the stock price, we prefer the net earnings figure. (data source)
Industry representatives say that AFFO is more reflective of a REIT’s health. For the purposes of determining the future direction of the stock price, we prefer the net income figure. (data source)
The following is the breakdown of the Dogs of the Dow (found here) in week nineteen, compared to other fundamental ratios. Continue reading
On this date in 1901, the amazing ride known as the “Nipper Panic” ensued. this was a day that began with rumors and ended with incredible market turmoil.
Northern Pacific Railroad was referred to as “Nipper” back in 1901. On May 9, 1901, the price of Northern Pacific went from $160 to as high as $1,000 during the trading day, before settling at a price of $325 at the close.
What brought about such a panic? Two syndicates, supposedly working in unison to elevate the price of Northern Pacific, had a difference in opinion as to what was considered “high” and “high enough.”
However, in order to gain a sense of perspective on the Nipper Panic, we need to look at what Northern Pacific was trading at in the year prior to May 1901. On May 3, 1900, Northern Pacific had the following quotes (New York Stock Exchange. New York Times. May 3, 1900. pg. 11):
The above data indicates that the share price of Northern Pacific rose from $57.75 on May 3, 1900 to the closing price of $143.50 on May 7, 1901 (or +148.48%), shortly before the “panic” set in (New York Stock Exchange. New York Times. May 8, 1901. pg. 11.).
The way that syndicates worked, at the time, was a group of well-heeled investors (now called “accredited investor”)* proposed pushing the price of a stock up or down by informing the public of their plans after having bought a large share of a specific company. With this information, depending the names of the people involved in the syndicate, the general public would place their bets on the direction of the stock, either long or short.
In this instance, the involved syndicates were the Harriman and Hill-Morgan. Initially, the Hill-Morgan and Harriman syndicates were pushing up the share increase of Northern Pacific. However, at a certain point, some members of the Hill-Morgan syndicate felt that the shares had risen “enough” and began, in opposition of the syndicate, to sell their shares.
Meanwhile, the Harriman syndicate had automatic orders to buy any and all shares of Northern Pacific as soon as they became available. Being such large shareholders, market makers were more than glad to have a willing buyer at any price and put the shares to Harriman.
Unfortunately, the illiquidity of the market not having enough sellers to offset buyers caused the shares of Northern Pacific to attain the $1,000 level. The carnage imposed on the sellers/short sellers was only relieved once the syndicate participants agreed to ease their automatic buying and selling program.
This is why my econ professor emphasized that cartels don’t work in the long run (see OPEC). Someone is always going to get greedy and ultimately reneg on the agreed upon terms (see Saudi/Russian Oil price war). Not mentioned in that awesome econ class is that one party in the cartel will end up bruised and beaten beyond recognition while the other side could be considered a “winner” (see U.S./Canadian oil producers).
In this case, the breakaway members of the Hill-Morgan syndicate not only sold but they short-sold the shares of Northern Pacific. The brutality of the shares rising from $143.50 to $1,000 and then closing at $325.00 had to leave a mark.
Other data from the changes in price from May 8, 1901 to May 9, 1901:
see also:
*Notes:
Posted in Nipper Panic, Northern Pacific, On This Date
On November 30, 2018, we posted 10-Year price targets for Power Corporation of Canada (POW.TO) when the stock was trading at $26.35. At the time, we had estimated 2020 undervalued and extreme undervalued targets of $22.74 and $15.31, respectively.
Since November 2018, Power Corporation of Canada has had an intra-day low of $17.47 on March 23, 2020.
see also: All 10-Year Targets
Posted in POW.TO, Target Achieved
After our posting yesterday, Aaron’s announced that it beat estimates.
Check our updated undervalued and extreme undervalued price targets in our May 6, 2020 posting and see if Aaron’s is right for your risk profile.
Posted in AAN, Target Achieved
Below are the downside support lines for Twilio Inc. (TWLO) from 2016 to 2017:
Below are the downside support lines for 2017 to 2020: Continue reading
Below are the valuation targets for Aaron’s (AAN) for the next 10 years. We have made significant material changes based on the current data. Continue reading
On November 24, 2018, we posted 10-Year price targets for Aaron’s (AAN) when the stock was trading at $48.49. At the time, we had estimated 2020 undervalued and extreme undervalued targets of $38.25 and $27.79, respectively.
Since November 2018, Aaron’s has had an intra-day low of $13.01 on March 23, 2020.
see also: All 10-Year Targets
Posted in AAN, Target Achieved
Below are the valuation targets for AT&T (T) for the next 10 years. Continue reading
On March 24, 2019, we posted 10-Year price targets for AT&T (T) . At the time, we had estimated 2020 undervalued and extreme undervalued targets of $27.57 and $18.20, respectively.
Since March 2019, AT&T has had an intra-day low of $26.08 on March 23, 2020.
We’d be watchful of the $18.20 target as it is still a possibility.
see also: All 10-Year Targets
Posted in ATT, Target Achieved
When talking to a well versed analyst of real estate investment trusts (REIT) you will learn a few essentials of the industry. The primary essential when it comes to REIT earnings is adjusted funds from operations (AFFO). You want to know the AFFO so that you can determine the quality of earnings.
As outlined by the Investopedia, AFFO is:
We would have preferred to use the National Association of Real Estate Investment Trust’s (NAREIT) definition of AFFO however they are clear in saying the following of FFO and AFFO:
“It is important to emphasize, however, that the underlying premise of the definition of FFO is not to sanction deviations from GAAP in the name of calculating Funds From Operations. In fact, the definition specifically refers to GAAP net income as the starting point in the calculation of FFO. Moreover, FFO is not intended to be used as a measure of the cash generated by a REIT nor of its dividend-paying capacity (NAREIT. Financial Standards White Paper. December 2018. page 3.)."
This might explain why there is a definition of FFO but no formula on the NAREIT website, in spite of the fact that every seasoned analyst of REITs is adamant about using AFFO to determine the ability of a REIT to pay a dividend.
One element of a REIT that you’ll be asked not to look at in determining the quality of a REIT is their net income. For some reason, net income is considered not relevant to the discussion of how well a REIT is run.
Realty Income: A Simplistic View on AFFO and Net Income
Realty Income (O) is the standard by which all other REITs aspire to become. Realty Income pays a substantial dividend on a monthly basis. The consistency of the dividend payment has earned the company a wide following.
In spite of the much deserved attention to the long-term benefits of holding Realty Income, there is one point that needs an investor’s close attention, the tendency for the share price to decline by -34%. In the last 23 years, Realty Income has trended lower in 10 of those years (43%). The regularity of Realty Income to decline by such substantial amounts should allow investors to pick and choose exactly when they want to buy (we’re not advocating selling here).
Understanding that the price of Realty Income is likely going to provide significant buying opportunities, it is worth taking the time to examine which attributes tip investors off as to what the ranges of undervaluation are. In this case, we’re going to look at the AFFO, net income, and stock price to see which components give us clues about the range of possibilities for buying Realty Income. Already we know that declines of -20% to -40% are indications based on price. But what does AFFO and net income tell us?
Below we compare Realty Income’s AFFO to the stock price on a year-over-year basis from 2004 to 2019.
For the entire 15-year period, 12 out of the 15 years (80%) saw a coincidence between the AFFO and change in the stock price. In the interest of measuring the potential for downside risk, we like to draw our attention to the periods when there are declines in either the stock price or the AFFO. This allows an analyst to project both buying opportunities and potential times to lighten up on holdings (Note: we understand that the claim is always to buy and hold forever a security like Realty Income. However, our pursuit is to recommend buying at infrequent but highly opportune times.)
In only one year (2009) out of fifteen (6.67%) did the AFFO decline, which also corresponded to the negative changes in stock price for that same year. Alternatively, there were five years that the price of Realty Income experienced declines but out of those periods only once (20%) did AFFO correspond to declines in share price. Again, AFFO is not representative of, or an observable determinant in, the stock price. However, there is little information conveyed about downside risk in the rare occurrence of a decline in AFFO.
Below we compare the net income to the stock price on a year-over-year basis from 2004 to 2019.
Eleven out of the 15 years (73%) saw coincidence between net income and change in the stock price. When we look at net income versus the stock price, there were four years (80%) that corresponded to the negative change in the stock price. Of the fifteen year period that is covered, there were five years of decline in the stock price.
In total, there were eight instances of net income declining with only four years of the stock price corresponding to the declines in net income leaving a coincidence of 53% between net income and the stock price.
Data Debrief
Thoughts
Given the above data, there appears to be a clear difference between AFFO and net income. As an analyst or an investor, we would want the data set that is the most reliable and gives some semblance of potential for downside risk.
On the one hand, AFFO seems to be the most predictable as it rarely ever declines. However, on the other hand, the net income seems to be the most consistent with the change in the stock price declines.
As an analyst or an investor, we prefer the metric that generates the best return. The best return is generally arrived at by making reliable assessments and acting in a timely manner based on the quality of the assessment.
If we had to make a review of a REIT’s prospects based on 20% of available data we would not feel confident enough to make an investment. If we had to make a review of a REIT’s prospects based on 80% coincidence with stock price declines then we would have some level of confidence in timing and allocation.
It should seem obvious that net income is far superior to AFFO for the sake of predicting future prospects of price declines. Since AFFO isn’t supposed to be used as a measure of cash generation or dividend paying capacity, why is it that AFFO gets all the love? Maybe a review of net income is more useful than previously thought.
Posted in AFFO, NAREIT, O, Realty Income, REIT
The Coppock Curve was never intended to be use on individual companies but we continue to challenge that premise as more data are available which allow our team to back test the strategy.
There are times when this indicator have proven to be less effective on companies (Ford or CVS) while other have shown strong track record.
With extensive research on this indicator, our team decided to track the performance of some companies on a monthly basis and hope that our readers could utilize them as source for their long-term investment strategy. We begin the month of May with 4 companies that have established a buy signal using the Coppock Curve. Continue reading
It should not go unnoticed that since the 2009 low, Alphabet (GOOG) and Microsoft (MSFT) have had essentially the same change in their stock price. However, unlike GOOG, Microsoft has paid a dividend the whole time that GOOG has been publicly traded. This means that Microsoft has been crushing it in the department of total returns.
Percentage change without dividends since March 9, 2009:
Percentage change with dividends since March 9, 2009:
Though they don’t directly compete on all levels, GOOG appears to be the superior more formidable upstart, by comparison. Which begs the question, what would the valuation levels for GOOG have been if they paid the same dividend as Microsoft since going public?
Below we explore the levels that GOOG would be considered undervalued or overvalued if it paid exactly the same dividend as Microsoft from 2004 to 2020.
Altimeter
The Altimeter is a calculation of price relative to dividends. It is very consistent over time although less so with high tech companies. For this reason, a tech stock can and does exceed the overvalued targets but is reined in with dramatic declines in short periods of time.
Undervalued and overvalued levels based on Altimeter since 2004 are reflected in the chart below.
According to the Altimeter, as devised by Edson Gould, GOOG is at or near the overvalued range and should not be acquired at the current prices.
Dividend Yield Profile
All dividend paying companies traded in a historical range from undervalued to overvalued and then back to undervalued.
If GOOG paid a dividend that was based on what MSFT had paid since 2004, then GOOG would have an overvalued dividend yield of 0.14% and an undervalued yield of 0.29%.
So far, GOOG is trading near the higher end of the presumed yield range. That doesn’t mean that GOOG is a sell, it just means that the stock isn’t a buy at the current price.
The question is, if GOOG isn’t undervalued, at what price would Alphabet be at if it were yielding a presumed 0.29%? Below we have the expected price targets for Google over the next ten years based on the Altimeter. We’ve chosen the Altimeter because it is so closely aligned with the dividend yield profile.
Conclusions
Alphabet has passed the phase of being the scrappy upstart ready to topple the Microsoft empire. Instead, it is a shared world of domination for both companies.
Eventually, GOOG is going to start paying a dividend. Initially, the dividend will be low on a yield basis but the rate of increases will be exceptional on a year-over-year basis. GOOG will be paying a dividend that is in line with the dividend that is currently paid by Microsoft.
For this reason, we don’t believe that the use of Microsoft’s dividend history applied to Google is such a far out concept. Especially when GOOG has had difficulty in beating the price performance of MSFT since the 2009 low.
see also:
Posted in Altimeter, GOOG, MSFT, relative yield, Yield Profile
On October 4, 2018, we posted 10-Year price targets for Toro Co. (TTC) . At the time, we had estimated 2020 undervalued and extreme undervalued targets of $55.67 and $36.52, respectively.
Since October 2018, TTC has had an intra-day low of $52.07 on March 18, 2020, achieving the undervalued target.
see also: All 10-Year Targets
Posted in TTC