Buying undervalued stocks and real estate investment trusts (REITs) is my favorite way to invest. Stock market crashes can be one of the most lucrative times to invest in the stock market because investors can purchase high-quality companies at a discount. Historically speaking, bull markets don't last forever. While no one knows when the next market crash will happen, here are three surefire REITs to buy when it does.
Is the stock market going to crash?
Market corrections have become an inevitable part of our economic cycles. And after an incredible run the past year in the stock market, there is a lot of writing on the walls indicating that a market crash could be coming soon.
Robert Schiller's CAPE ratio, a trusted indicator that has predicted the past two severe market crashes, including the dot-com crash and the Great Recession, reached new highs in early November 2021. Margin debt, which helps companies leverage debt to invest in various securities, has also reached extremely high levels; single-year growth in margin debt has reaching similar levels only before the bursting of the dot-com bubble and the Great Recession.
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Stock market crashes aren't necessarily something to fear. Those who were invested in the market back in March 2020 (our most recent crash) have likely seen their portfolio not only bounce back but surpass 2019 levels. While the severity differs from crash to crash, one thing is for sure: Bear markets are often ripe with opportunities for new investments. Here are three REITs I'm sure to buy if the market crashes.
Sun Communities
Sun Communities (SUI -1.72%) is a company I've had on my radar for quite some time and is an ideal REIT to purchase if the market crashes because it specializes in an industry backed by long-term demand.
Sun Communities specializes in the ownership, leasing, and management of mobile home communities as well as RV resorts and marinas directly serving the desperate need for affordable housing in the 39 states it operates in. It's had stellar performance over the past year and a half, thanks largely to a boost in RV and marina demand as people find new ways to vacation during a pandemic.
As of Q3 2021, year-over-year (YOY) revenues have grown 70.8%, YOY funds from operations (FFO) have increased 31.9%, and YOY net income has grown 12.4% and its current performance well exceeds pre-pandemic levels. The company is also in a great financial position, having lowered its debt-to-EBITDA ratio to 4.9 times while still having $71.6 million of cash and cash equivalents on hand.
Sun Communities' major drawback today is its share price. Its current price-to-FFO ratio, a common metric used to determine if a REIT is overpriced or undervalued, is 30.54 times. Considering a fair price-to-FFO range is in the mid-20s, share prices are a bit expensive right now.
Innovative Industrial Properties
One of my favorite REITs is Innovative Industrial Properties (IIPR -3.07%). This REIT uses a unique investment strategy, purchasing and leasing industrial real estate exclusively for the use of medical marijuana businesses. Since the company first became public in 2017, share prices have grown 68% on an annualized basis while providing investors with a total annualized return of 75.20%. Quarter after quarter the company outperforms expectations, and there still is room to grow. Only 36 states have made medical marijuana legal, but projections estimate that by 2025, medical marijuana will be legalized in all 50 states.
Like Sun Communities shares, Innovative Industrial Properties shares are trading at a premium (currently a price-to-FFO ratio of 45), making it a prime candidate to purchase in a pullback. I currently own shares of IIPR and am always looking to increase my position in this company, but only if the price is right.
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Equinix
Equinix (EQIX -5.38%) is one of the top REITs in the entire industry, having a well-diversified portfolio of data center facilities across the globe. Data centers play a key role in keeping our world connected by storing and processing data. The pandemic created an accelerated demand for data centers as more people moved online to work, shop, and live, which has given the company a huge boost in revenues.
The company is projecting an increase of 10%-11% increase in revenues from 2020, which already saw an 8% increase when compared to 2019. Its strong performance has driven up prices to a price-to-FFO ratio of 47.5, and share prices are already relatively high for a lot of investors. A market correction would be the perfect time to invest in this company at a more affordable price while gaining exposure to the growing data center industry.
The goal isn't to time the market perfectly but rather to be informed of what companies are backed by strong leadership, solid balance sheets, and a high-quality portfolio to take advantage of when the opportunity arises. Many people flee the market when things are down, but it's my favorite time to double down, and I know I'll be purchasing more shares of these three REITs if the market crashes.
