I have been bullish on the market since late March 2009. I wrote in my newsletter at that time that a new bull market had been born. I have been a bull ever since.
Economies and markets are cyclical, however. This current bull market will eventually end and a new bear market will begin.
The last bear market took 53% out of the S&P 500.
I do not believe in being fully invested in the market at all times. That is called “passive” investing. I believe in “active” management.
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I have grown very cautious here in 2016 as the market is struggling to stay out of a bear market. Both the U.S. small and mid-cap indexes have already dipped their toes into bear territory, but quickly moved back into the danger zone instead.
This is currently a very precarious market indeed.
I currently have a 40% pile of cash on the sidelines, and another 15% invested in some inverse Exchange Traded Funds (ETFs) as a hedge.
I have put a safety net under the accounts that I manage through these inverse funds. If the market does go into a bear market, I am prepared to increase my inverse funds positions.
I still have about 45% in stocks, however. There are still a lot of stocks that are holding up well and many are actually still hitting new highs.
Real Estate Investment Trusts (REITs) are having a very good year. This is still very much a low interest rate environment. Income and growth investors are searching for alternatives to bonds that have the potential for capital appreciation on top of their yields. REITs are one of those vehicles right now.
All REITs are not created equal, however. Some are leaders and others are laggards. Some have performed well and others not so well. Some are well managed and some are poorly managed. Some are growing their earnings while others are not.
In addition to this, some are expensive and some are not. In my style of investing, I like to combine performance (momentum) with value (potential capital appreciation.)
That’s where CoreSite Realty Corporation (COR) comes in.
CoreSite is headquartered in Denver, Colorado. It owns and manages 17 data centers in the US. Their secure data centers house communications, storage and networking technology.
They deliver secure, reliable, high-performance data center and interconnection solutions to a growing customer base.
CoreSite connects, protects and delivers an optimal performance environment, continued operation of mission-critical data, and IT infrastructure for enterprises and Internet, private networking, mobility, and cloud service providers. With a market capitalization of $1.94 billion this is a somewhat aggressive REIT.
Consider the fact that CoreSite has grown their earnings at an annualized rate of 79% per year over the last five years. This makes it a bit of a hybrid. In reality it is a “growth” REIT.
As I mentioned earlier, I like to find stocks that combine performance with value. I have seen too many expensive performers or momentum stocks over the years.
I have also seen my share of “value traps” during my twenty years in the business. I like to have both performance and value in the stocks that I own.
Let’s begin with the valuation of CoreSite:
CoreSite has a forward PE Ratio of 16.32 and an expected 5 year annual growth rate of 15.7%. This makes for a very reasonable PEG Ratio of 1.04.
In addition to this, when I apply my valuation formula to the shares, I come up with a five-year target price of $99.47.
This gives the stock 72.3% upside potential which is great for a stock also paying a 3.4% dividend. This is a very good value when compared with other REITs.
Now let’s look at the performance of the shares since going public back in 2010:
As you can see, over the past year COR has delivered a solid 33.2% return while the market is down 8.9%.
Over the past three years, the stock has delivered an average annual return of 30.1%, while the market has delivered just 8.2%.
Over the past five years, the stock has also beat the market by a wide margin. COR has delivered an annual average of 38.3% per year, while the market has only delivered an average of 8.0%.
This is some serious alpha!
However, you know the saying: past performance is no guarantee of future results. It is nice to see such a stellar track record of how that stock has treated its shareholders, however!
The stock earns a momentum grade of B+. That is pretty good in this current volatile market.
When I run the numbers on the performance and the valuation combined on this small-cap REIT, I come up with the following overall grade and rank.
The stock currently ranks #147 out of 4,163 different stocks, ETFs, and mutual funds in my database. Not bad for a REIT.
The stock also has a very healthy chart right now.
Gunderson Capital Management is currently long COR in our Income & Growth Portfolios.