It’s easy to be a “good investor” when everyone is making money. When the market is up 30% in a year, the odds are pretty good that you’ll enjoy logging into your TDAmeritrade account and watching the value of your positions increase. “Look at me,” you’ll chuckle to yourself, spreading your arms aloft in front of your laptop like Leonardo DiCaprio at the bow of the Titanic, “I’m the king of the world!”
But good investing times can also breed bad investing habits. So it pays to take advantage of a crisis like this to go back and look at the companies you liked a year ago and ask yourself whether that pick still makes sense, whether your thought process in selecting it was sound, and whether you would buy it again today. To illustrate this process, I’m going to walk through that analysis with a prior post I did about Essex Property Trust (ESS), a residential REIT with extensive holdings on the West Coast.
I did a post about ESS on February 11, 2020. That was about 2 months ago. For long-term buy-and-hold investors (and, since this is a blog about dividend investing, I am going to assume that you’re a long-term buy-and-hold investor), 2 months is nothing. If a stock was a decent investment two months ago, it’s probably a decent investment now. Sure, things can change – CEOs can be fired or rung up on criminal charges, Enron-like events can strike out of nowhere, etc. – but, by and large, if a stock is a buy for a dividend investor it will probably stay a buy for years and years. I buy shares of Starbucks (SBUX), one of my favorite companies, a few times a year without even really checking the price. I just like owning Starbucks, don’t have any plan to sell my shares, and pretty much always want to own more of it. It would take a gargantuan event to get me to reconsider that position. But, as it happens, we’re in the middle of a gargantuan event in the form of the worldwide COVID-19 pandemic (although, for the record, I’m still long SBUX.) So I thought that now would be a good time to go back, review that post, and see how my analysis holds up. This is always a good thing for investors to do, pandemic or no. Look at your old predictions or analyses and ask yourself, as non-judgmentally as possible, What the fuck was I thinking?
When I wrote the last article, I was bullish on ESS. The share price that day was $317.04. Things have, uh, changed. As of this writing, ESS trades at $238.79. Meaning that if you bought ESS back on February 11th of this year, you’re down about $79 per share and you’re probably not feeling great right now. In fact, you probably feel like you’ve been stuck on a long elevator ride with an especially amorous grizzly bear.
But has anything really changed? People are still renting fancy apartments in big West Coast cities. Sure, a lot of folks have lost their jobs (and presumably aren’t paying rent as a result), but there doesn’t appear to have been a massive drop in rents, indicating that the market is roughly steady. It’s possible that everyone working from home will convince employers to embrace telecommuting and the importance of living in big, expensive cities like SF and Seattle will decrease concomitantly. But, if I had to guess, there will still be a demand for apartments in those cities 5 years from now and those apartments will still be pricey. Meanwhile, companies that lease residential real estate have a pretty stable business model since their leases tend to be a year (or more) in duration. So it’s hard to say how much has changed for ESS because of the COVID-19 pandemic, but, looking at the long term, I would have a hard time faulting you for thinking the answer is “not tons.”
Meanwhile, we ought to keep in mind that when the share price of a stock decreases so does the risk associated with buying that stock. When I last wrote about ESS in February, the shares traded at a P/FFO multiple of roughly 23 times last year’s FFO/share. (“FFO” refers to “Funds from Operations” and REIT investors tend to use P/FFO instead of the usual P/E ratio favored by investors in other types of companies.) Now ESS trades at about 17.3 times last year’s FFO/share. So the stock is certainly cheaper. Similarly, the dividend (which appears safe since it has been increased for 25+ years running) has only gotten more appealing. At last writing, the stock yielded 2.46%. Today’s yield is roughly 3.44%.
The bottom line is that looking at traditional valuation metrics (P/FFO and dividend yield) the stock looks even better now than it did when I first wrote positively about it. There are big uncertainties here. I could be wrong in my positive view about the company’s long-term outlook. I could be wrong about the stability of the dividend. COVID-19 could impact us all in yet-unforeseen ways. (In fact, it probably will.) But the key question in the analysis is this: Has anything major and permanent changed about the business itself? If the answer is no, as I at least tentatively believe it is in this case, then a falling stock price should only serve to further whet the investor’s appetite.