Dividend Sensei

Valuation Matters And It Matters A Lot

Adam Galas

13 postsApril 24, 2021

It’s been an eventful few years for investors, to say the least. However, Wall Street keeps climbing its wall of worry – as it always has, and always will.

(Source: Michael Batnick)

Consider this: 2018 was the worst year for stocks since 2009, declining a modest 4% on recession fears and a trade war.

2019 saw a 30% rally – the strongest since 1987.

2020, which saw stocks fall 34% in one month, finished up 18%.

And in 2021 year-to-date, the market is up 11% – so far setting a pace that surpasses even JPMorgan’s best-case prediction of 25%.

This year has also seen a spike in long-term interest rates and uncertainty about corporate taxes, as well as the biggest surge in global COVID-19 cases yet. Yet stocks keep charging higher thanks to expectations of 60% earnings growth from 2020 through 2023, or 17% annual growth.

It seems safe to say that, after many years of incredible returns, the market is more than pricing in all the positive fundamental expectations.

S&P 500 2023 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

The good news is that, over the long-term, stocks almost always go up.

The bad news is that valuation always matters in the long-term – a lot.

Not so much in the short-term, admittedly. According to Bank of America and JPMorgan, just 7% of stock returns are explained by fundamentals over mere 12-month periods.

But over 10+ years, 91% of them are, especially concerning starting yield and valuation mean reversion.

In the short-term, luck is 11x as powerful as fundamentals. In the long term, fundamentals are 11x as powerful as luck.

So which one do you care more about: immediate gratification or building a better future?

Bank of America recently did a study that found that, since 1987, 80% of returns are due to valuation mean reversion for companies with relatively stable fundamentals. This includes our kind of blue-chip dividend stocks.

S&P 500 2026 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

While the S&P 500 isn’t likely to deliver very strong gains over the next five years, it’s also not likely to suffer the 20-year bear market that some famous perma-bears are currently predicting.

Over the very long-term (30+ years according to Princeton) and after valuation changes cancel out, it should deliver 7.9% annual total returns. In which case, it would be in line with its 7%-9% historical rate.

Adjusted for inflation, that’s about 6%.

However, always remember that it’s a market of stocks, not a stock market. So even very rapid growth probably won’t save investors in certain overvalued blue-chips from experiencing a painful correction…

Or even multi-year bear market.

Taiwan Semi Is About 100% Overvalued

(Source: FAST Graphs, FactSet Research)

Fortunately for us, there are always attractive opportunities available. Even during the tech bubble – when the S&P 500 became 67% historically overvalued and some stocks were trading at price-to-earning ratios of 3,000 – there were attractive blue-chip opportunities available.

For instance:

Berkshire Hathaway (BRK-B) was 50% undervalued.
Realty Income (O) was 50% undervalued with 7x cash flow and avery safe 11% yield.
Enterprise Products Partners (EPD) was 50% undervalued while trading at 6x cash flow with a very safe 12% yield.

Over the next 15 years, investors who bought those three made as much as 2,300% total returns.

It might be hard to believe, but even in this overheated market anti-bubble, 50% discounted blue-chip bargains are still available. For instance…

British American Tobacco Is 50% Undervalued Right Now

(Source: FAST Graphs, FactSet Research)

Or, if growth is your goal, how about the 43% undervalued Alibaba?

Alibaba Is the Most Undervalued Hyper-Growth Blue-Chip on Wall Street

(Source: FAST Graphs, FactSet Research)

But if you’re uncomfortable owning Chinese companies due to their inherent regulatory risks, you can always consider this next pick instead.

Amazon Is the Best Ultra SWAN Hyper-Growth Deal You Can Find Today

(Source: FAST Graphs, FactSet Research)

And if maximum safe yield is what you seek, there are plenty of attractive blue-chips yielding between 6% and 9%.

Magellan Midstream Offers the Highest Safe Yield on Wall Street

(Source: FAST Graphs, FactSet Research)

The point is that getting and staying rich on Wall Street doesn’t take genius, merely a disciplined application of financial science.

This is what Charlie Munger calls, “consistently not [making] stupid” decisions.

Or take it from Joel Greenblatt. He summarized the strategy that made him 40% annual returns for 21 years like this: “We’re buying above-average quality at below-average prices.”

If you want to take charge of your financial future and achieve the comfortable retirement you deserve, then you don’t need luck. You can make your own by focusing on the fundamentals.

And when it comes to fundamentals, history has shown that valuation matters – and it matters a lot.

Happy Investing

Adam Galas

13 posts

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Adam Galas is a retired Army Medical Services Officer with an economics degree from the University of Minnesota who combines his 23 years of investing experience with a disciplined application of time-tested methods. Adam is holding or has held positions as a professional analyst at The Motley Fool, Seeking Alpha, and Simply Safe Dividends. His work has also appeared on thestreet.com, Forbes and Stocknews.com.

Due to his love of Buffett-style investing in safe, undervalued, dividend growth stocks, Tipranks recently ranked him Americas 43rd best analyst. And he is the second-most followed writer on Seeking Alpha, where as he is also a co-founder of Dividend Kings.

Thanks to a love of Buffett-style investing in safe, undervalued, dividend growth stocks, he was recently ranked the 43rd best analyst in the country by Tipranks and is the second-most followed writer on Seeking Alpha.

Adjust Your School Caps, Boys and Girls; the Learning Isn’t Done Yet

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Valuation Matters And It Matters A Lot

Adam Galas

13 postsApril 24, 2021

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