The Fed’s War on Inflation Is Over

And this unloved sector is primed to fly... [TradeSmith Daily logo] [TradeSmith Daily logo] July 23, 2024 The Fed’s War on Inflation Is Over By Lucas Downey, Contributing Editor, TradeSmith Daily The June consumer price index (CPI) report revealed a surprising state of affairs... The Fed’s inflation fight might finally be over. Consumer prices fell 0.1% month-over-month, the first decline in over four years. With this news, traders quickly agreed that high interest rates – meant to fight inflation – will soon reverse lower... According to the CME FedWatch Tool, the odds of a 25-point cut in interest rates at the September meeting are over 97%. Thus, a breathtaking sector reshuffle is now in motion. Popular tech trades have unwound and capital is being put to work in the battered small-cap space. But that [epic portfolio-equalizing event]( put one previously abandoned sector in especially great shape: Real Estate. If you recall, two months ago we made the [non-consensus call to start grabbing real estate stocks]( as the deeply oversold sector was a screaming buy due to a compelling valuation. That was a prescient call, as real estate investment trusts (REITs) have begun a very powerful climb recently. Today we’re going to lean into why you should own high-quality real estate stocks given the latest macro tailwinds. Even more, I’ll isolate one top-ranking REIT set to thrive in this new paradigm... The Case for Real Estate Stocks Just Got Stronger The surprise CPI report effectively sent the message Wall Street has been waiting for: The Federal Reserve has the green light to finally cut interest rates. Once smart investors digested the inflation-killer signal, they sent the odds of a rate cut to the stratosphere... 97.4% as of Monday. This new macro information caused a violent sector reshuffle. In just six trading days, money fled the hot Technology sector and rotated into cyclicals like Energy, Industrials, and Materials, along with high-yielding Real Estate. Check out the sector leaderboard since the CPI print hit last Thursday: - Real Estate and Energy have pumped 4.84% and 4.68%, respectively - Financials, Industrials, and Materials all climbed 3.3%, 2.99%, and 2.79%, respectively - Information Technology and Communications Services – the other sector where you’ll find big tech stocks, such as Google (GOOG) and Meta Platforms (META) – flopped 5.69% and 5.9%, respectively Believe it or not, this is healthy action. For so long, mega-cap tech was all the rage. Now that interest rates are set to decline, the path is paved for new leadership. Real Estate, the worst-performing sector the last two years, has gotten a shot of life as rates have reached levels last seen in March. Below you’ll see the inverse relationship that REITs have with the 10-year Treasury yield. When yields drop, REITs pop: This macro datapoint is a feather in the cap to Real Estate investors. The dividend-rich area becomes attractive to yield-hungry investors when rates fall. At last measure, money market funds – which currently pay north of 5% interest – have amassed a staggering $6.4 trillion in assets: As interest income dwindles, it intuitively makes sense that investors will seek out other areas for their income needs. With the S&P 500 Real Estate sector boasting the highest yield of all sectors at 3.31%, money will surely find its way there. It’s only a matter of time. But that’s not the only reason to keep buying real estate stocks today... SPONSORED AD [U.S. Stocks Explained in 1 Terrifying Chart]( [There’s a single chart to explain the ENTIRE U.S. stock market...]( And more importantly, where it’s headed in 2024... My name is Eric Fry, and after 40 years in the market – accurately predicting The Dot-Com Crash, The 2008 Crisis, and the crashes of 2020, and 2022... I thought I’d seen it all... Until I saw this... [THIS is the most terrifying chart I’ve seen in over 24 years](. The same chart I saw right before $5 trillion vanished from stocks back in 2000. So, if you want to save your retirement account from being sliced in HALF... but you also want the shot to grow your retirement account 10-fold, then it’s time to prepare [Click here to get the details, in my new interview]( There’s Even Better News While we wait for that money shift, we’re already in the early innings of a very powerful oversold Real Estate signal. Back in late May, [when I blew the bullhorn on REITs]( the forward price-to-earnings (P/E) ratio stood at 16.74 for the next 12 months (NTM) timeframe... which is in the lower threshold of history. I shared the forward returns for the S&P 500 Real Estate sector when that event occurs. As a reminder, when the Real Estate sector has an NTM P/E of 17 or less: - 3 months later, the group pops 6.4% - 12 months later, it’s a solid 24.3% ripper - 24 months later, you’re staring at a 52.4% surge Since that post, this signal has delivered, with the Real Estate sector making a stately gain of 6.45% all in the span of two months. And the next 12-month P/E is still interesting, currently at 17.77 – a discount to the S&P 500’s 21.99. So, if we’re in the midst of a sector reshuffle, and we’re coming off a depressed valuation back in May, what’s left to do is: isolate a rockstar stock! The Best REIT for Your Watchlist As always, we’re going to rely on data to spot the leader. And right now, the highest-ranking REIT I can find is Essential Properties Realty Trust (EPRT). If you’re unfamiliar with EPRT, their business is dead simple. They manage single-tenant properties with long-term leases. Some of their tenants are names you’ll be familiar with: Mister Car Wash (MCW) and Zips Car Wash, Ruby Tuesday, Captain D’s, and AMC Theaters (AMC). Those are solid tenants with stable business models. In fact, as of December 2023, EPRT sports an occupancy rate of 99.8%. With stats like that, it’s no wonder that revenue has steadily climbed since 2020, from $164.4 million to $360 million in 2023. That has allowed Funds From Operations (FFO) to rise in lockstep. In 2020, FFO came in at $1.01 per share and surged to $1.66 per share in 2023. Throw in the fact that the company pays a fat dividend yield of 3.8%... and you’re looking at a solid potential investment. Those are juicy numbers. And if you think REITs can’t keep up with the overall stock market... you’re wrong. On a one-year basis, EPRT has matched the 20% gain in the S&P 500 ETF (SPY): It’s all lining up...but there’s one metric left to check... The one that tells us if a stock is ready for liftoff. I’m talking about the [Quantum Score]( – which measures the overall fundamental and technical ranking in one easy-to-understand number. EPRT boasts an ultra-healthy Quantum Score of 79.3, with both technical and fundamental scores well into the green buy zone. This single number seals the deal for me that EPRT is a top-notch REIT to consider now: Keep this name on your radar through year-end and beyond. As interest rates fall, REITs will benefit. And once money begins to flow out of red-hot money markets, they’ll be hunting for dividend-rich areas... including real estate names. It’s important to note that all REITs are not created equal... betting on the highest-quality names is paramount. This is where tools like the Quantum Score, built into my business partner Jason Bodner’s [Quantum Edge Pro]( service, can help you sift the contenders from the pretenders. Every Monday afternoon, subscribers receive an email placing the model-portfolio recommendations into the context of the latest market action – driven by Big Money (institutional) buying and selling. The Big Money Index and the Quantum Edge Hotlist – a ranking of Top 10 and Bottom 5 stocks based on Quantum Score – along with Jason’s data-driven analysis will show you the Big Money moves to follow. Jason can tell you more about [Quantum Edge Pro here](. Given the sector reshuffling that’s taking place, there’s no better time to start using [Quantum Edge Pro]( than now. Regards, Lucas Downey Contributing Editor, TradeSmith Daily Get Instant Access Click to read these free reports and automatically sign up for research throughout the week. [25 Doomed Blue Chip Stocks]( [3 Stocks to Build Your Wealth in 2024]( [5 Unapologetically Profitable Stocks for 2024]( © 2024 TradeSmith, LLC. All Rights Reserved. P.O. 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