As the housing downturn continues and looks poised to get worse, it remains best to approach real estate stocks cautiously. Admittedly, the shares of real estate investment trusts (or REITs) and the stocks of other companies involved in the real estate industry, have already fallen considerably, in anticipation of more challenging times ahead.
However, many real estate stocks can still drop much further, as their fundamentals are poised to deteriorate more. Factors such as rising interest rates and the recession that, in all probability, will occur next year, are likely to put additional pressure on the sector’s valuations.
Still, although you should take a pass on most equities in the real estate space right now, some of these names are worthy candidates for bottom fishing. For example, there’s one micro-cap real estate brokerage stock, hammered so far this year, that could make a stunning recovery over the next two years.
Of the eight real estate stocks listed below, avoid the first seven at all costs, but consider adding a relatively small amount of the eighth one to your portfolio.
|Digital Realty Trust
|Global Net Lease
Dream Finders Homes (DFH)
Dream Finders Homes (NYSE:DFH), while not a household name, is an up-and-coming homebuilder in the United States. The company benefited greatly from the pandemic housing boom. Its revenues came in at $744.3 million in 2019 and analysts, on average, expect it to generate $3.3 billion of sales this year.
That said, with rising interest rates curbing the demand for housing, the company’s outlook is highly uncertain. Even after DFH stock tumbled nearly 50% so far this year, further declines may lie ahead for the shares.
Over the past year, the cancellation rate for Dream Finders’ new homes have spiked by around 83.5%, climbing from 13.9% to 25.5%.
DF, trading for only four times analysts’ average 2022 earnings estimate, may look dirt cheap. But as the demand for DFH’s housing keeps dropping and its cancellation rate keeps climbing, it could end up reporting far less stellar results in 2023. As a result, the company’s valuation could continue to drop.
Digital Realty Trust (DLR)
Macro factors are also negatively impacting companies involved in other types of real estate, including data centers. That’s why owning Digital Realty Trust (NYSE:DLR) stock could be risky.
Due to rising interest rates which put pressure on REITs’ valuations, DLR stock has dropped 37.8% so far this year. However, the shares of this leading data center property owner could continue to tumble. due to the economic slowdown.
In the long run, DLR and its peers could be rendered obsolete. At least, that’s the view of a prominent short seller, Jim Chanos. Earlier this year, Chanos began to publicize his bearish view on data center stocks.
As big -tech companies start to build their own data centers, the demand for third-party data center space could decline, Chanos contends. That, in turn, could severely impact the price of DLR and other data-center REIT stocks.
Global Net Lease (GNL)
Given its low-valuation compared to other REITs (on a price to funds from operations, or P/FFO, basis) and its high dividend (it has a forward yield of 12.3%), you may wonder why I’ve chosen to include Global Net Lease (NYSE:GNL) on this list of real estate stocks to sell.
But while this diversified REIT may look like a screaming, deep-value buy on a stock screener, don’t assume that GNL stock will definitely generate above-average returns.
As a Seeking Alpha commentator argued last month, GNL may reduce its dividend.
Indeed, its funds from operations have been trending lower since 2018. The downward trend of its FFO is likely to continue, as the interest expense on GNL’s floating-rate debt rises.
Management has slashed the company’s dividend before in response to declining FFO and is likely to implement another one. Since Global Net Lease is a possible yield trap, it should be avoided.
Opendoor Technologies (OPEN)
Sure, it may seem as if the “worst-case scenario” is already priced-into Opendoor Technologies (NASDAQ:OPEN) stock. The shares of the large-scale house-flipper have fallen by more than 90% in the past 12 months.
Still, far from a hard-hit stock with a strong chance of making even a partial recovery, OPEN stock could continue to tumble. In October, Goldman Sachs’ Michael Ng downgraded the shares from the equivalent of “hold,” to “sell” and severely slashed his price target on the name.
With the decline of housing prices, the analyst believes that the home-flipping companies will need to raise their fees and/or widen their buy-sell spreads in order to preserve their margins. Those changes could lower their purchase volumes, negatively affecting their future growth.
The golden days for Opendoor and other home flippers may never return. Instead, the current housing recession could demonstrate the flaws behind their business model, which was once considered “innovative.”
Lendingtree (NASDAQ:TREE), which operates the well-known online lending marketplace of the same name, is one of the real estate stocks that has been hit the hardest by the 2022 housing market downturn.
Yet, while the shares have sunk by high double-digit percentage levels so far in 2022, don’t assume that TREE is a bargain.
Last quarter, its revenue tumbled 20% year-over-year due to the housing downturn, and its operating losses have also widened.
With the housing market likely to worsen further in 2023, TREE’s operating results probably won’t improve in the quarters ahead.
Even if you have a long time horizon and are willing to hold the shares until the housing market improves, a comeback could prove elusive for TREE.
Given the company’s dependence on paid search traffic (something its management has conceded is an issue), it may be hard for the company’s profitability to return to the levels necessary to justify a rebound by TREE stock.
Already the subject of controversy during its days as a privately-held, “unicorn” startup, WeWork (NYSE:WE) made headlines (in a bad way) again in 2021, after the workspace-solution provider’s debut on the NYSE, via a special purpose acquisition company (or SPAC) merger.
Add in changing market conditions, and it’s no surprise that WE stock has been a disaster for investors. After sinking from $10 to $2.71 per share, some may believe that WORK stock has bottomed. Even so, you may not want to jump to that conclusion.
Although WeWork offers a more flexible alternative to traditional office space, the company could still be severely impacted by both the economic downturn and by the fact that work-from-home isn’t fully going away.
Chronically unprofitable, WE is a real estate stock to sell, due to its poor fundamentals.
Zillow Group (ZG)
Earlier this year, I argued why Zillow Group (NASDAQ:ZG) was one of the top real estate stocks to sell ahead of a housing market downturn. Now the downturn is in full swing, and Zillow stock has sunk from the mid-$60s to the mid-$30s, but I’m still bearish on it.
While ZG stock slumped heavily, the real estate services firm (which smartly cut its losses and got out of home flipping in 2021) remains pricey. Analysts’ average forecast calls for its earnings per share to drop from $1.44 to $1.12 in the coming year, giving Zillow a forward earnings multiple of around 33.
That valuation is excessive for ZG, considering that its earnings aren’t currently expected to increase in 2024 and could decline further in that year.
Douglas Elliman (DOUG)
After looking at seven real estate stocks to sell, now it’s time to look at the one that’s worth buying. Founded over a century ago, Douglas Elliman (NYSE:DOUG) is a small real estate brokerage firm that has expanded considerably outside its original market of New York City over the past decade.
Spun off by Vector Group (NYSE:VGR), a holding company, DOUG stock debuted on the NYSE late last year. In hindsight, this may have been an ill-timed move, as the housing downturn has pushed DOUG’s shares well into penny-stock territory. However, DOUG’s big price decline over the past year (from $12 to $4 per share) has given investors a good opportunity.
Currently further expanding its presence by moving into new markets like Washington, DC, the realtor could make a big comeback when the housing market stabilizes, enabling its shares to bounce back towards their 2021 levels.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.