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Another candidate for accumulation – RealtyIncome (O)

Another stock (O) is being pushed down by temporary sell off. I believe it is a temporary sell off and here are my reasons for it. The company released its 3rd quarter results from which the revenue dropped from $34.7 million in previous quarter in 2011 to $27.0 million. All other metrics seems to me staying at the same level or increasing. The dividends also increased in the previous period. So what caused the drop? The company states that it was the one-time payments to preferred stock redemption and merger related costs.

And here it comes. The company is going to acquire all outstanding stocks of American Realty Capital Trust (ARCT). Isn’t acquisition considered as a good sign in the investing world? Will that make Realty Income stronger? Mainly when considered the mission of this company which has been increasing dividends for 14 consecutive years? This acquisition will bring a portfolio of investment-grade tenants (such as manufacturing, other industrial and office properties) and Realty Income overall portfolio on retail tenants would increase from 19% to 34% and their non-retail portfolio from 14% to 19%. You can read more about this acquisition here. Overall, I look at this event positively.

The company purchased 87 new properties last quarter and revenue from the existing properties increased last quarter. The Company estimates that 2013 FFO (funds from operations) per share should range from $2.30 to $2.36 per share, an increase of 12.7% to 18.0% over the 2012 estimated FFO per share of $2.00 to $2.04. FFO per share for 2013 is based on an estimated net income per share range of $0.93 to $0.99, plus estimated real estate depreciation of $1.44 and reduced by potential gains on sales of investment properties of $0.07 per share. It is planning on increasing the dividend in 2013 by 37c to $1.947 per share (an increase by circa 6%).

Looking at the mission of the company, its management and workers in the company who proved over time their diligent strive to create a company on which people who are looking at steady income (such as retirees) can relay on, I believe today’s price action creates another opportunity to accumulate.

Let’s take a look at the stock from the technical perspective.

The stock is attacking its major support, which I believe is at $40.30. We touched this support a few times in the past in August and in September. Currently it looks like the stock is forming a head and shoulder pattern and it is now breaking thru the support at $40.30 level. Will this level hold?

It may or it may not. If this level won’t hold we may go as low as to $38 level, where I think is the next support, see the chart above showing 5 year chart. For almost whole last year the stock was drifting downwards and finally picked up in October 2011 and since then it was a rising stock. Are we going to repeat the same trend? On the 5 year chart see the red short downward line. This line is an exact copy of the same line in the middle of the chart indicating the period of slow downward move last year. Thus the red line may be a projection of what may happen again. If that happens, considering the outlook of the company and considering that the economy may finally pick up and grow next year, this consolidation may be a great opportunity to buy more shares of this company.

What will be my approach then? I will continue watching this stock carefully at this time and moving more cash to my account. As soon as I can see reversal in the stock I will use the same buying strategy as I used in Abbott (ABT) to buy more shares.

Happy Trading





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