The Folly of Form over Substance

During every market cycle, fads happen. They become very obvious in hindsight, but the tricky part is recognizing them in real time. My prediction? Some real estate investment trusts that are currently being touted by investment analysts will be trading at the exact same prices five or so years from now (assuming the markets are rationally valued at that time.) Even if the profits grow, the countervailing force of valuation compression will be a nasty offset ensuring mediocre returns.

I’ll give an example. I just finished reviewing a company called Iron Mountain. It is a giant data manager that stores documents, communications, and official records for corporate clients. The investor community loves this stock for three reasons. It is asset light, as the majority of the capital expenditures involve securing data rather than investing in factories and real estate. It is perceived as a very scalable business because corporate clients can be added easily with a low marginal cost. Thirdly, it pays a high dividend and recently converted to a REIT status, and this is currently favorable with income investors (because the interest payments from competing investment opportunities like high-quality bonds have been at historic lows for more than five years.)

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