Real estate stocks are currently oversold, creating a potential opportunity for investors, according to BMO. The sector, which is part of the S&P 500, has shown significant underperformance compared to the index on a year-over-year basis. This abnormal underperformance historically marks a turning point for the sector, with real estate investment trusts (REITs) outperforming the S&P 500 by an average of 17% in the year following such troughs.
BMO believes that the stocks have been unfairly punished in response to interest rate trends. Despite historically performing better during periods of falling interest rates, they have still managed to outperform in a higher rate environment. Fundamentals for REITs also look promising, with increasing free cash flow yields and decreasing debt.
Some REITs that BMO rates as outperform include Boston Properties, which offers a 6.4% dividend yield and has potential upside. Equinix, a data center REIT, saw a stock rally fueled by an earnings beat. Ventas, which specializes in senior housing communities, and Host Hotels & Resorts, which owns luxury hotels, also present opportunities for investors with their dividend yields and potential upside.
Overall, BMO recommends using the current weakness in real estate stocks as a buying opportunity, as the sector is expected to rebound in the coming months.