Prologis stock: Here's why the market is willing to overpay

January 17, 2024 at 07:12 AM EST

Prologis Stock price

There is a new cycle coming to you, and each cycle brings with it a set of opportunities that leave most investors - maybe you've even been there - hitting their heads and wondering what could have been. Today, you won't have to be in that position; a very particular set of markers are pointing to one stock you won't want to miss.

Wall Street authorities have spoken out on their expectations for this new trading year. Considering where the United States economy stands, these outlooks make a lot of sense, especially with a new FED pivot proposing interest rate cuts coming this year. Real estate is one of the first sectors to show signs of a new turn, so you'll want to focus there today.

For reasons that will become clear in just a bit, Prologis (NYSE: PLD) is a stock that has traders writing checks at premium valuations, all for a good reason. As you read and digest the data involved with this name, keep in mind the old saying, "It must be expensive for a reason." Ready, set, go!

Time the machine

From right to left, you can start measuring the sentiment in the real estate sector first. The Vanguard Real Estate ETF (NYSEARCA: VNQ) can be a great place to start forming this opinion, especially in its past quarterly performance against the broader S&P 500 index.

A 5.7% outperformance will place the real estate sector above all others in this period. As markets are forward-looking, you can expect that the price action is a direct insight into where markets expect earnings in the space. So, working backward, you may be wondering what is causing the turnaround and breakout of the sector.

Well, you can start by reading through The Goldman Sachs Group (NYSE: GS) outlook report for 2024. To save you time, one of the main themes is a breakout of the manufacturing sector in the United States, an event sponsored by the FED rate cuts as a catalyst.

Because there is an expected - and justified - breakout in the economy's manufacturing sector, you could just as quickly expect a spike in activity among other industries, such as transportation and logistics. Think about it: all the new production activity in manufacturing needs to go from the factory to end consumers; think logistics.

A heating economy, alongside cheap money and financing, will likely start an upward trend in real estate, but not all property is built equal. The truck transportation industry added 3.3 thousand jobs in the past month, according to the employment situation report; here's what that means for Prologis.

Check the gauge

Zooming in further into the REIT (real estate investment trust) space, you can see how the broader market is rewarding Prologis stock in light of these new coming trends for the industry. There will be two main 'market languages' to be translated here, so get your pencil ready.

Starting with price action, you already understand that the real estate space is beginning to outperform the broader markets, but what's there to say about Prologis stock here? Considering that this name trades at 96.0% of its 52-week high prices, you can safely assume that the momentum - and sentiment - is bullish.

Moving past the price action, you should ask yourself one main question: how much are traders and investors willing to pay for this stock today? Because the incentive to buy a stock lies in its future earnings, you can use the forward price-to-earnings ratio to gauge today's price for tomorrow's earnings.

Starting with a benchmark that you can measure Prologis against, the large capitalization (company sizes over $50 billion) REITs trade at an average forward P/E of 20.6x today. Given that Prologis sells for a 24.0x multiple, it is commanding a 16.2% premium to the group, which is enormous considering the sector's stability in valuations.

To answer the question as to why markets would be willing to overpay for another REIT stock can bring you back a few paragraphs. Remember that it is all interconnected to bring you to the best stock in a sector that could outperform.

Because cheap money and a perceived breakout of manufacturing can push real estate prices up, Prologis gets an automatic boost in sentiment. Add to this the logistics-specific spike that will ensue from these trends, the price action, and the current valuations, and you have yourself a potential winner.

However, markets are turning wild this year, so always be aware that all of this only puts the odds in your favor but doesn't guarantee a winning hand.

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Prologis stock: Here's why the market is willing to overpay

Time the machine

Check the gauge

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