Finding Rare Value in Value Investing

I'm not a value investor. As regular readers know, it's my belief that weak assets tend to stay weak, or at least weaker than comparatively stronger options, and that the best opportunities lay within areas of the market that are performing, not lagging.

Problem is, there simply wasn't much that worked in 2008, leaving almost the entire equity market deeply in "value" territory. Only two of the Dow's 30 components, McDonald's (MCD) and Wal-Mart Stores (WMT), rose for the year. Widespread carnage left a majority of mutual-fund categories tracked by Lipper down by some 40%. According to Bloomberg, just six of the 1,611 U.S. mutual funds that invest in stocks and have more than $250 million in assets gained in 2008. Investors' pessimism, as evidenced by withdrawals from equity mutual funds, is at historic highs.

So if you're a value investor who thrives on swimming against the tide, now might be the time to consider wading into retail and real estate, currently two of the most despised corners of the capital markets. Weak consumer spending and the housing collapse are both widely seen as ground zero for the ailing U.S. economy.

Those sectors just happen to be the focus of FTSE NAREIT Retail Index Fund (RTL), an off-the-beaten-path ETF largely allocated to retail real estate, mostly shopping centers and regional malls.

Where Contrarians Shop

FTSE NAREIT Retail Index Fund (RTL) -- 2 year

Retail has been a near bloodbath, as thrifty and otherwise tapped-out consumers contributed to a disastrous holiday season. More than a handful of national chains have already filed for bankruptcy in recent months including Linens 'N Things, Steve and Barry's, KB Toys and Circuit City. It's widely expected that more will follow in the wake of a weak Christmas.

Of course, real estate has been equally anemic, with the Standard & Poor's/Case-Shiller home-price index falling 18% over the year ended in October and dropping some 24% from its 2006 peak. Commercial real estate prices, as measured by Moody's/REAL Commercial Property Price Indices, are down almost 12% from their October 2007 peak.

Those realities have certainly been reflected in shares of RTL, which came public back in the summer of 2007 at near $50 a share and traded below $12 this past fall. At a recent $18 a share, the fund is yielding more than 11% and is dominated by shopping mall owners Simon Property Group (SPG), Kimco Realty (KIM) and Federal Realty Investment Trust (FRT) .

My top choice for value players in real estate continues to be NETS Tokyo Stock Exchange REIT Index (JRE), highlighted in this space in November. Yet the multidecade bear market in Japanese real estate demonstrates what might end up being the fate of real estate as an asset class here in the U.S.; not a continuing collapse, but rather a long-slogging lethargy that doesn't get shaken for decades. This is why I'm not a value investor -- oftentimes values can stay values longer than we might ever imagine.

But for the intrepid contrarian who thrives on buying when the public pukes, RTL might end up looking like a bargain, even from a dividend standpoint alone. Successful investors have a knack for taking the other side of the herd's trades, and with the ETF's unique concentration on retail-oriented real estate, it's hard to find an area of the capital markets more shunned and unloved.