The real estate sector is holding firm in a bullish formation, displaying notable resilience compared to the broader market. The Real Estate Select Sector SPDR Fund ETF (NYSE: XLRE) has been consolidating near its highs, just 2.7% away from its 52-week peak, setting the stage for a potential breakout in the year’s final quarter. While the broader market faced selling pressure mid-week, with the SPY ETF dropping nearly 1% on Wednesday, XLRE demonstrated relative strength, closing the day up almost 1%. This brings its YTD gains to 10.6%, supported by momentum over the past several months.
A Shift From Headwinds to Tailwinds
Over the past year, the real estate sector grappled with rising borrowing costs, which weighed on property values and REIT stock performance. However, the Fed’s recent rate cuts and signals of additional reductions are turning this headwind into a tailwind for the sector. REITs, which struggled in higher-rate environments, now stand to benefit from reduced borrowing costs.
Momentum is evident in the sector, with XLRE up over 20% in the last six months and net fund flows increasing by 14.51% over the past three months, suggesting growing investor confidence. This shift follows a lengthy consolidation period that persisted for over a year, but the recent strength indicates that real estate bulls are now in control.
In a positive indicator for the sector, RE/MAX Holdings’ September Housing Report noted that while home sales dropped 13.3% from August (a seasonal pattern), the median sale price held steady at $429,000, up 4.6% from last year. RE/MAX President Amy Lessinger highlighted that rising home inventory offers buyers more options, adding that lower mortgage rates could spark increased activity heading into 2025.
3 Real Estate Stocks That Offer Exposure to This Bullish Trend
Why XLRE Is a Smart Option for Passive Real Estate Exposure
The ETF holds a Moderate Buy rating, with analysts expecting more upside based on its consensus price target. The recent consolidation near highs signals the potential for a Q4 breakout, especially if the broader market stabilizes near highs amidst further rate cuts. For investors seeking passive exposure to the real estate sector’s recovery, XLRE offers a well-rounded approach with minimal stock-picking risks.
Fed Rate Cuts Could Boost Realty Income’s Performance Further
Realty Income (NYSE: O) Known as “The Monthly Dividend Company,” Realty Income specializes in triple-net leases, where tenants cover property expenses like taxes and maintenance. This REIT has a 4.92% dividend yield and an impressive history of increasing its payout for 108 consecutive quarters.
Realty Income has gained 12% YTD and almost 20% over the past six months, outperforming many of its peers. Its focus on free-standing commercial properties in the U.S., U.K., and Spain makes it a reliable income-generating asset. With the Fed shifting to rate cuts, Realty Income is well-positioned to benefit from the changing economic environment, making it an attractive choice for income-seeking investors.
Real Estate Momentum Boosts EQR’s Appeal for Investors
Equity Residential (NYSE: EQR) focuses on luxury apartment properties in dynamic urban markets like New York, San Francisco, and Seattle and is expanding into cities like Denver, Dallas, and Atlanta. With a 3.56% dividend yield and a 24% YTD return, EQR has been a strong performer in 2024, driven by robust rental demand.
EQR’s portfolio of over 80,000 apartment units is tailored for long-term renters, offering stability and diversification in uncertain markets. With the real estate sector gaining momentum, EQR’s short-term strength makes it appealing for investors looking to capitalize on recent momentum.
Like the XLRE, EQR is consolidating above rising key moving averages, just 3.7% away from its 52-week high. From a technical perspective, it looks primed for a breakout above its 52-week highs, but it’s important to note that the company is set to report its third-quarter results on Wednesday, October 30, after the market close.
In the week heading into the first quarter earnings report for its 2025 fiscal year (FY), Lam Research Corp. (NASDAQ: LRCX) stock was down nearly 15%. Furthermore, analysts were lowering their price targets for LRCX stock over concerns of slowing growth that would make it difficult to see the stock outperforming the market.
However, the stock is reversing course with a gain of over 4% in early trading the morning after the company’s earnings report. Is this a temporary lift or a sign that Lam Research may be proving its naysayers wrong?
Before reviewing what came out of the earnings report, it’s important to get a sense of what the company does and why that’s significant for investors. Semiconductors have been a volatile sector in the last four years, mostly to the upside. That’s because this is a sector that provides the “picks and shovels” that allow companies to build out their artificial intelligence (AI) infrastructure.
Lam Research in turn makes wafer-fabrication equipment and related services that the chipmakers need. In a world where more chips are needed in smaller spaces, Lam’s etch and deposition machines allow chips to be stacked vertically.
A Bullish Reversal May Be in Play
Analysts aren’t necessarily bearish on LRCX stock. Heading into earnings, the consensus price target for the stock was $141.28. That suggested an increase of over 90% in 12 months. And it comes after the company completed a 10-for-1 stock split in October.
But the concerns weren’t without some merit. Prior to the fourth quarter of FY2024, Lam Research had delivered several quarters in which revenue and earnings came in lower year over year (YOY). This makes sense when you consider where the company is in the semiconductor chain.
Many chipmakers were forecasting slower growth. If companies need fewer picks and shovels, those companies will need fewer handles and spades.
However, the trend shifted in the fourth quarter of FY 2024. This came at a time when many chipmakers started to upgrade their internal forecasts. But as investors know, one time doesn’t make a pattern. That’s why it’s significant that this is now two consecutive quarters where Lam Research delivered a YOY beat on revenue and earnings.
Artificial Intelligence Continues to Provide a Tailwind
The headline numbers in the company’s earnings report showed topline revenue of $4.17 billion, higher than the $4.06 billion that analysts were expecting. On the bottom line, Lam delivered earnings per share (EPS) of 86 cents, above expectations of 81 cents.
Although the company won’t offer full-year guidance until next quarter. It did project its second-quarter revenue to be $4.3 billion, which is higher than the current forecast for $4.22 billion. The company is forecasting EPS of 87 cents, which is above estimates for 85 cents.
And according to Lam Research’s president and chief executive officer, Timothy Archer, it’s demand for AI applications that will continue fueling this growth. Although not giving specific numbers, the company sees strong growth in leading-edge logic nodes (NAND) as well as areas such as high-bandwidth memory (HBM).
LRCX Stock May Have Confirmed Support
The Lam Research analyst forecasts on MarketBeat are showing that analysts are wasting no time in doubling down on their outlook. Since the report, four analysts have lowered their price targets on LRCX stock with two of the forecasts being below the consensus price of $97.29. Supporting that price target is the company’s forward price-to-earnings ratio around 20x which puts it in the lower half of technology stocks.
However, while it may be too early to go all in on the stock, it’s important to note that the bounce after earnings may be confirming a double bottom for the stock around $72 per share. The question is whether the stock will continue to move higher. At one point in pre-market trading the stock climbed near $78 before pulling back to around $75.
After shares skyrocketed by nearly 30% in one day on Oct. 24, they have now reached that target. However, it’s entirely possible that new and higher targets will emerge for the company after this strong single-day rise. I’ll dive into what exactly this company does and how I see it going forward.
PureCycle: Working to Revolutionize Plastic Recycling
PureCycle is working to commercialize a technology that recycles plastic trash into what it calls “ultra-pure recycled (UPR) resin.” This resin can then be used to create new plastic products. The company is specifically focused on recycling polypropylene (PP). This is the type of plastic used to make things like bottle caps, pill containers, and car bumpers.
In contrast, manufacturers use polyethylene terephthalate (PET) to make plastic soda bottles, for example. PP is a harder plastic, which can increase the difficulty of recycling it due to factors like its higher melting point. The difficulty in recycling PP is shown in the data. According to Cleantech Group, it has approximately a 3% recycling rate, compared to 15% for PET. This leaves millions of tons of PP going to the landfill.
Parker Bovee at Cleantech points out that not only is recycling PP more difficult on a physical level, but it is also highly uneconomical at this point. Recycled PP costs around 80% more than new (referred to as virgin) PP. This results in manufacturers having a much higher incentive to create new PP, contributing to the further buildup of waste. However, there is hope that recycled PP could become price competitive with virgin PP, as this is now the case with PET.
PureCycle is using an advanced method of recycling to try and fix this problem. Mechanical recycling is the traditional method used for things like plastic bottles. It cleans, shreds, and then melts down material for reuse. This process doesn’t work well for PP. It weakens the material very quickly, making it unusable after just 2-3 recycling cycles. PureCycle’s method is called solvent dissolution.
Chemicals strip away impurities like dye and adhesive from the plastic, leaving the pure plastic afterward. Researchers have shown that the process is highly energy-efficient compared to other methods, but it still remains very costly.
PureCycle’s Financial Situation and Business Developments
PureCycle currently has no revenue. It aims to achieve revenue once it can scale up processing operations to a reasonably economical point and can provide customers with a consistent source of URP to use in their operations. The company calls its flagship processing facility Ironton.
As of right now, PureCycle is primarily working to increase its processing up to the goal of 107 million pounds annually at Ironton. The company is making progress. It called June its “most successful operating month”; it produced 1.1 million pounds of plastic pellets. However, it is still far from meeting its short-term goal, which is to produce 1 million pounds of plastic pellets per week.
From a liquidity perspective, PureCycle is burning a significant amount of cash on a quarterly basis and will require infusions of cash over time, diluting current investors. Over the last three quarters, the company’s cash from operations averaged -$38 million. It would not have had enough cash to continue operating for another quarter based on its balance sheet. However, in September, the company said it expects to raise an additional $90 million from equity issuance to Sylebra Capital and Samlyn Capital.
PureCycle Is Cutting Edge, But Is Investing in Recycling a Flawed Idea?
Overall, I feel that PureCycle is an innovative company that can provide a large environmental benefit one day. However, from a business perspective, it’s hard for me to see the light at the end of the tunnel. Indorama Ventures, one of the largest PET processors, has struggled to stay profitable throughout the years despite its immense scale.
This shows there may be a fundamental issue with investing in plastic recycling. That doesn’t mean PureCycle’s stock price can’t rise; it just might be a challenging industry to get behind.
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