2023-07-12 14:49:13 ET
Summary
- STAG Industrial's history of consistent growth, attractive yields, and diverse portfolio present a compelling opportunity for long-term investors.
- STAG's long-term outlook appears strongly bullish, with ascending broadening wedges indicating escalating price volatility and bullish hammers suggesting an upward price trajectory.
- The emergence of an inverted head and shoulders pattern indicates the potential for price increases.
The world of real estate investment trusts, especially industrial REITs, remains intriguing despite recent setbacks. Amid this landscape, STAG Industrial, Inc. ( STAG ) emerges as an enticing prospect with its shares trading at a discount relative to its peers. This article delves deep into the technical prognosis of STAG Industrial to forecast its future price trajectory. The market displays robust bullish trends with the formation of an ascending broadening wedge and bullish hammers, indicating that the price is poised to ascend from its current levels.
Exploring STAG Industrial's Investment Potential
Industrial REITs continue to present investment opportunities, despite experiencing pullbacks. STAG Industrial is one such opportunity that looks particularly appealing due to its discounted price relative to its peers. The shares of STAG Industrial have fallen more than 25% from their early 2022 highs, a decrease not out of line with the broader REIT sector or the industrial niche in which it operates. However, this discounted price appears to be a compelling value play, especially considering the strong financial results STAG has posted for the first quarter of 2023 , such as a high occupancy rate and robust rent increases on expiring leases.
A significant concern for industrial REITs at present is the fear that the pandemic-induced boom in demand has subsided. This concern stems from the fact that increased online shopping due to social distancing and work-from-home mandates led to higher demand for industrial assets like warehouses. Now that the world is adjusting to coexist with the virus, companies such as Amazon have announced plans to reduce investments in industrial assets, causing some investor panic. Despite these apprehensions, STAG's strong financial results, such as a solid 97.6% occupancy rate and a notable 35.3% increase in rents on expiring leases, indicate that demand remains robust.
Furthermore, STAG's funds from operations (FFO) payout ratio stood at a healthy 65.70% in the first quarter, suggesting that its dividend is far from risk. This percentage also leaves room for potential dividend growth. STAG's average dividend yield for 2023 is 4.25%. Given these figures, even with the overall pullback in the industrial REIT sector, STAG seems to be demonstrating resilience and could be an interesting prospect for dividend investors.
Another point in STAG's favor is its attractive valuation as compared to its peers, as seen in the chart below. At the end of the first quarter, STAG's price-to-FFO ratio sit at 13.32. This discrepancy, which still persists, suggests that STAG is an appealing prospect for value-conscious investors. When compared to prominent REITs in the industrial space, such as Prologis, Inc. ( PLD ) and First Industrial Realty Trust, Inc. ( FR ), STAG still stands out as notably cheaper.
Despite being in a sector currently receiving negative sentiment, STAG Industrial's strong performance and attractive price relative to its peers make it a compelling investment opportunity. While Prologis is usually the first point of research for investors interested in industrial REITs, given its global scale and size, STAG's performance and valuation make it an attractive alternative. With a possible tilt toward value investing, it might be worth taking on STAG, despite the overall negative sentiment surrounding the sector.
The Evolution of a Strong Bullish Formation
STAG's long-term prospects appear strongly optimistic, as can be discerned from the monthly chart below. The chart delineates the formation of ascending broadening wedges that trace their origin from the 2016 low of $10.38 to the all-time high of $45.25, signifying escalating price volatility. Notably, during the COVID-19 recession period, there was a dip in price below the ascending broadening wedge. However, the price did not close below the triangle and in fact, rebounded to hit an all-time high.
This dramatic drop in STAG's value, dipping below the ascending broadening triangle, can be attributed to the widespread trepidation and volatility during the early stages of the COVID-19 pandemic, which triggered a comprehensive stock market sell-off. This was more a general response to the extraordinary global crisis than a reflection of STAG Industrial's performance or prospects. Furthermore, the potential for an intense economic downturn sparked worries of reduced demand for industrial spaces. In such recessionary times, businesses frequently scale down operations, thereby decreasing the demand for warehouses and distribution facilities.
The stock price retraced lower after reaching an all-time high and hit the trendline at the critical intersection of the green and blue trendlines. This was seen as a strong buying signal in the STAG market. This buy signal was reinforced by the emergence of a bullish hammer at $25.69, indicating that the market had bottomed out and was set to rise. A second bullish hammer appeared at $30.57, and since then, the price has been progressively moving higher. The bullish pattern predicts a continued upward trajectory for STAG's stock price. This bullish outlook is further consolidated by the rising RSI from the mid-level 50.
STAG Monthly Chart (stockcharts.com)
Key Action for Investors
The weekly chart below provides further insight into STAG's bullish outlook. An inverted head and shoulders pattern emerged at $25.69, $28.68, and $30.57, with the neckline at $37. This neckline also acted as a critical level for the previous head and shoulders pattern that was formed after the all-time highs were hit. Currently, the price is moving above the $37 mark, breaking this neckline. This suggests that investors might consider buying at this level in anticipation of higher prices. The short-term target for this upward movement is $40, however, the price is expected to continue to rise after breaking through this barrier. The RSI lifting from the support of mid-level 50 serves as a strong buying indication.
STAG Weekly Chart (stockcharts.com)
The short-term outlook remains strongly bullish as suggested by the daily chart below. The chart presents an inverted head and shoulders pattern, marked in red, which was formed at the bottom when the bullish hammer emerged on the monthly chart. This robust bottom formation suggests that the price has reached its nadir and is poised for an upward trajectory. The overall daily chart structure also supports a bullish stance, evidenced by the blue inverted head and shoulders pattern.
STAG Daily Chart (stockcharts.com)
Market Risks
STAG Industrial stands out as a promising investment opportunity, given its strong financial performance, enticing valuation, and positive technical forecast. Nevertheless, prospective investors should weigh these advantages against the relevant market risks. Like any entity, STAG is not immune to fluctuations in economic conditions and market volatility. The threat of an economic slump, for instance, could decrease the demand for industrial spaces as businesses downsize, thereby impacting STAG's occupancy rates and rental income.
Moreover, REITs are notably sensitive to interest rate changes. A significant upswing in rates could inflate borrowing costs for REITs and diminish the appeal of REIT dividends relative to other investments. Although STAG boasts a diversified portfolio across different geographies and clientele, major shifts in the business operations of its primary tenants could potentially affect its revenue and profitability.
In terms of technical analysis, STAG's overall outlook is strongly bullish, yet the emergence of an ascending broadening pattern hints at high volatility. Consequently, a price break below the $25 mark could pave the way for further downward movement. Therefore, while STAG presents an attractive opportunity, investors should also remain mindful of these potential market risks.
Bottom Line
Despite recent setbacks in the REIT sector, STAG Industrial stands as a compelling investment opportunity due to its robust financial performance, attractive valuation, and bullish technical outlook. It has exhibited resilience through a high occupancy rate, robust rent increases, consistent dividend growth, and an appealing FFO payout ratio, which indicate its strong position within the industrial REIT space. The appearance of a bullish hammer within the context of an ascending broadening wedge signals a potential uptrend in price. The inverted head and shoulders pattern further bolsters the bullish outlook for STAG. With the price now surpassing the key neckline level of $37, it suggests an increase in market buying pressure and the potential for higher prices in the upcoming weeks. Consequently, investors might view the current price level as an opportune moment to buy STAG Industrial, expecting a rise in the future.
For further details see:
STAG Industrial: Buy The Market (Technical Analysis)