Warren Buffett was once quoted as saying his “favorite holding period is forever.” While I share that sentiment, there are times when selling is a wise decision. Last week I made the difficult decision to sell two-thirds of my position in STAG Industrial (NYSE: STAG). Here’s why.
It’s important to emphasize that I believe in management’s vision and execution. However, I have concerns about the company’s valuation. Simply put, at its current level, STAG Industrial does not have a true place in my portfolio.
My portfolio is bifurcated with real estate investment trusts (REITs), dividend-paying value stocks -- a significant portion of my holdings -- and long-term growth stocks to outpace inflation over the long term. For the latter, valuation isn’t a significant concern. However, for investments like STAG Industrial valuation is paramount.
My investment in STAG has exceeded the expectations I held when I first acquired shares. The triple net lease industrial REIT has been on fire this year, with shares advancing 32%.
And therein lies the problem: STAG’s valuation appears stretched and could halt its strong rally. As a result, I took profit to buy more shares of dividend-growth REIT Innovative Industrial Properties, my largest holding.
Potential slowing economic activity could impact STAG’s stock
STAG Industrial shares appear priced for perfection. Currently, the REIT yields 3.4%, a figure near its all-time low and significantly lower than its historical range.
Unlike other REITs, the industrial sector held up relatively well during the pandemic. This was particularly true for REITs associated with e-commerce like STAG, which can brag of having Amazon as its largest tenant. During the pandemic, e-commerce stocks exploded as lockdowns forced many shoppers online.
A return to normal was always expected to impact e-commerce growth, but recent earnings reports from Amazon and Walmart have noted greater-than-expected declines for their online businesses.
Admittedly, branding STAG as an e-commerce-only REIT is an oversimplification, as its properties also provide logistical support to brick-and-mortar retailers as well.
Unfortunately, the reopening trade is also underperforming as retail sales fell more than expected in July. The combination of lower e-commerce and traditional retail sales could put pressure on growth and occupancy if it continues. To date, STAG Industrial seems unaffected, raising its full-year core FFO guidance to $2.03 at the midpoint in the second quarter, an increase of 7.4% over the prior year.
Although STAG’s operations are unlikely to be significantly impacted by a short-term or moderate slowdown, the stock price could be a different story. Shares have continued to outpace FFO growth as investors are betting heavily on an economic boom that might be overstated. Any deviation from that bullish thesis could result in valuation repricing.
FOMO avoidance plan for STAG Industrial
Selling off a stock is always a difficult decision, and it’s historically been one of my biggest, most persistent investing mistakes. Earlier investments like Apple and Facebook are significantly higher than my exit point. To avoid this from happening with STAG, I’m maintaining one-third of my position for “FOMO avoidance” purposes.
But that’s also a nod to the company’s management. In addition to the monthly dividend payment, STAG Industrial remains a top-notch, forward-thinking operator, recently installing solar roofs on many of its buildings for added cash generation and to help tenants achieve their ESG and carbon-neutral goals.
Bottom line: There's nothing wrong with the company. But shares are trading near all-time highs, and the valuation seems stretched at present. For the time being, there are other, more compelling opportunities. In the event of a sell-off or management guidance for stronger year-over-year FFO growth, I’ll enthusiastically revisit my decision.