The time from the start of the pandemic early last year up to now has been a huge learning experience for me as far as investments go. One such learning is about sectors that are best placed to gain big in the years to come. The most obvious one is e-commerce. The move to online shopping would have happened anyway, but it has happened far faster than expected.
This bodes well for the entire e-commerce ecosystem. But specifically, I will focus on one such company that is also a real estate investment trust (REIT) specialising in warehouses. While the tilt towards e-commerce means that there is less need for brick-and-mortar stores, it has increased the demand for storage solutions for these goods. As a result these kinds of REITs have seen booming demand.
Segro booms on solid earnings
I am talking about the FTSE 100 stock Segro (LSE: SGRO). The company saw an impressive increase in profits last year, and has continued to maintain a robust performance this year as well. Its share price has been inching up as well. Over the past year, it is up by around 50%. And in the past five years, it has risen by 230%. Going by the promise of the sector, I expect its share price will continue to rise.
Why its low P/E matters
Moreover, its price-to-earnings (P/E) is at a dirt-cheap 6.3 times, which convinces me that it can rise further. Now, not everyone believes that a traditional valuation metric like P/E is a good one to assess REITs. This is because earnings’ calculations could include large depreciation costs. This can skew the results, even though depreciation is a notional number, where nothing is really being bought and sold. I do, however, still like to consider it because it gives me an invaluable assessment of how the stock compares to other FTSE 100 stocks.
Considering alternative valuation measures
But, keeping its drawbacks in mind for REITs, I also consider another metric. This is the price-to-net asset value (P/NAV) estimate. The net asset value (NAV) is assets minus liabilities. When a stock trades at a premium to NAV, it is considered already highly priced. And when it trades at a discount, then the stock can be expected to rise some more. I am inclined to take this measure with a pinch of salt too. This is because it does not explain why the Segro share price has been rising for much of this year, despite being at a premium to NAV.
My assessment for the FTSE 100 stock
So, in my assessment of the stock, I consider the returns it has given in the past, the outlook for the sector it functions in, the P/E to compare it to all other FTSE 100 stocks, and the P/NAV to understand how much higher or not it could rise in the foreseeable future. Three of these four ways to assess the stock indicate that it is likely to rise more. Segro is on my list of stocks to buy next.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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