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Actionable news in O: REALTY Income CORPORATION,

O No?


Realty Income, popular for its monthly dividend payments, has been a top-performing REIT, but, increasingly, analysts have become concerned about its valuation.

As an example, in a recent article, Seeking Alpha contributor Bret Kenwell disclosed that he'd sold the stock and predicted it could pullback as much as 20%.

We look at two ways of limiting Realty Income's downside risk over the next several months and discuss which approach is worth considering for risk-averse Realty Income longs.

Realty Income Still Pricey As A Former Long Sells

Last time we looked at hedging Realty Income (NYSE:O), in late February, we wrote that the REIT was pricey but it passed the two screens our site uses to eliminate some potentially bad investments. Since then, shares of Realty Income have been essentially flat, as the chart below shows.

On Monday, a day before Realty Income's scheduled earnings release, Seeking Alpha contributor Bret Kenwell explained why he decided to exit the stock (I Sold O). In short, while he still considers it to be a great company, he feels the stock's valuation has gotten stretched too far (Wall Street analysts tend to agree; more on that below). Kenwell says O could fall as much as 20%.

If you are long O, concerned by Kenwell's warning, and can't tolerate a decline of 20%, you ought to consider taking steps to limit your risk. The simplest of those steps would be to do what Kenwell has done and sell your shares. Another approach is to stay long and hedge. We'll look at two ways of doing that below, but if you'd like a refresher on hedging terms first, see the section titled, "Refresher On Hedging Terms" in our previous article on hedging Apple (NASDAQ:AAPL), Hedging Apple Ahead Of Earnings.

Hedging O With Optimal Puts

We're going to use Portfolio Armor's iOS app to find optimal puts and an optimal collar to hedge O below, but you don't need the app to do this. You can find optimal puts and collars yourself by using the process we outlined in this article if you're willing to do the math. Whether you run the calculations yourself using the process we outlined or use the app, one additional piece of information you'll need to supply (along with the number of shares you're looking to hedge) when scanning for an optimal put is your...