A Small-Cap REIT Poised To Profit

I recently came across an article on Cabot Wealth Network, which I subscribe to. It describes itself as “a family business established in 1970” and “a trusted independent source of advice for individuals striving to take control of their investments and find the best stocks.”

That’s not only a mantra I personally believe in; it’s also one I think they truly promote. With Cabot, those words aren’t just lip service.

So when, back on Valentine’s Day, it wrote about “A Small-Cap Stock Warren Buffett Would Like Now,” I paid attention.

Now, as the article states, Buffett wouldn’t actually buy this particular stock for any of his publicly traded portfolios. He rather can’t considering his enormous wealth.

Since I know that statement can come across as confusing, let me quote the Cabot piece itself. It reminds us how, back in 1999, the Oracle of Omaha said that,

“… ‘If I was running $1 million today, or $10 million for that matter, I’d be fully invested… It’s a huge structural advantage not to have a lot of money… The universe I can’t play in has become more attractive than the universe I can play in. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.’

“Buffett was saying he can’t buy small-cap stocks (the mosquitoes) because he has too much money. He would move the stock too much. He must ‘look for elephants,’ which are, of course, the large caps.”

It makes more sense in that light, right?

Put simply, smaller-cap companies have more room to run and therefore offer the opportunity for greater profits.

A Healthy Balance of Small Caps and the Big Guys

Along the same lines as Buffett’s complaint, Viraj Desai, senior manager of portfolio construction at TD Ameritrade, has said that, “it’s generally harder for a $100 billion company to double in size than it is for a $1 billion company to do the same.”

As such, it’s generally easier to double or triple your investment in a small cap than in a large cap.

If all things are even when it comes to quality and favorable market conditions.

Which isn’t always the case.

That’s why small caps – defined as companies that have a market capitalization between $300 million and $2 billion – also tend to offer more risk than their bigger brethren. They may be able to rise much more quickly; but they can fall just as fast, if not faster.

That’s another point the Cabot Wealth article brings up, specifically citing:

• SurveyMonkey (SVMK)
• Endava (DAVA)
• LeMaitre Vascular (LMAT).

All three stocks have charts that show some significant jumps upward. And those are tempting, to say the least.

But they also show distinct dips as well. And, let’s face it, those can be quite the turnoff. They even should be, to some degree.

After all, what’s the point of buying something now that you’re just going to sell in a panic next month?

It’s a good point. But so is the fact that most well-balanced and, ultimately, most profitable portfolios consist of both large caps and small caps.

The solution is to buy up high-quality examples all around. Like the “Buffett” pick below.

A Reason to Love This Hated Industry

“One of the reasons for Buffett’s sustained outperformance is that he bought insurance companies,” Cabot’s Tyler Laundon writes.

“Over the years, he’s purchased more than 10 companies that offer and underwrite various forms of insurance. Today, roughly 70% of Berkshire’s listed assets are in the “Insurance and Other” category.

Why? I don’t need to quote – or even read – the rest of the article to explain that. No doubt, neither do you.

All you need to do is think of all the things that could go wrong with your:

• Car
• Home
• Apartment
• Health
• Life
• Travel
• Purchases…

We’re encouraged to tack on insurance costs to our spending habits whenever and however we can. In many cases, such as with the vehicles we drive and the apartments we might rent, we’re even mandated to do so.

That’s why so many of us hate it so much. Because it’s almost impossible to escape.

From a consumer perspective, that makes it hard to handle. But for an investor, that makes it ideal…

Just the kind of thing we want to be a part of.

Small Cap, Big Money

Global Self Storage (SELF) is a self-storage “nano cap” REIT with a portfolio that consists of 13 self-storage properties with 948,840 sf. of total leasable space (includes owned and managed). The portfolio is primarily located in the Northeast, Mid-Atlantic and Midwest (and in South Carolina).

One the things that I like about this REIT and the self-storage industry is the high fragmentation that exists within the $40.2 billion sector. Approximately 1 in 11 U.S. households utilize self-storage (was 1 in 17 in 1996) and industry-wide demand remains high (average occupancy rates still above 91% in 2018).

SELF focuses on smaller cities such that it doesn’t compete with the bigger REITs like Public Storage (PSA) and Extra Space (EXR). Because of its size, the company can “move the needle” much faster and move earnings (funds from operations) and dividends.

Because of its small size, SELF flies under the radar, and is now trading at a discount: $4.26 per share with a dividend yield of 6.0 percent. I believe there’s significant room for multiple expansion (13.x to 16x) and FFO growth that could result in annualized returns in excess of 20% within one year.

Although the dividend coverage is tight, it (the dividend) appears sustainable and this ultra-small cap could make perfect sense for your higher risk REIT portfolio. Thus, we consider SELF not only a good buy, but a speculative one at that.

I own shares in EXR and PSA.

This post first appeared on Forbes.com. To see the original, click here.