W P Carey (NYSE:WPC) is a real estate investment trust, which owns and leases high-quality mission-critical commercial properties. The company was founded in 1973 and has been increasing its dividend every year since it went public in 1998. This is a very impressive feat, which puts WPC in the prestigious category of the so-called Dividend Aristocrats – companies, which have been steadily raising their payouts for at least 25 years.
Unfortunately, it looks like W.P. Carey will not be able to make it 26 in a row. The COVID-19 pandemic and the Work-from-home shift it caused decimated the office sub-sector of the real estate market. Nobody wants to pay the rent for an office building that stays empty. The problem is that WPC has some of those.
So, last week, the company announced that it was going to spin off its office real estate portfolio into a separate public entity. That’s the good news. The bad news, which sent the stock nosediving was the 10%-15% dividend cut, which is likely going to follow. REITs primarily attract dividend investors, who are especially unforgiving when it comes to a decrease in their payouts.
On the other hand, W.P. Carey is still a very high-quality company and the planned spinoff would only make it better by de-risking its business. Does this mean that the current selloff is a buying opportunity? At first glance, it definitely appears so, given WPC’s rather low P/FFO multiple. However, real estate valuations tend to drop in recessions and there’s a good chance we’re still headed for one. Besides, the chart below suggests the worst is yet to come for W.P. Carey shareholders.
W.P. Carey ‘s weekly chart reveals that the stock is on the verge of completing a huge Elliott Wave cycle. Its impulsive phase, labeled (I)-(II)-(III)-(IV)-(V), began in early-2000 and lasted until October, 2019. The five sub-waves of wave (I) are also visible and marked I-II-III-IV-V. Wave II culminated in the Great Recession of 2008. Wave III was a wonder to behold, which lifted WPC to almost $80 a share in 2013. Then, an A-B-C-D-E triangle correction formed in wave IV, before wave V could take the stock to an all-time high of $93.62.
According to the theory, every impulse is followed by a correction in the opposite direction. In this respect, the sharp plunge to under $39 triggered by the COVID-19 panic of 2020 was not that surprising. Just to be clear, we had no idea Covid was coming, only that it made Elliott Wave sense for W.P. Carey stock to drop for some reason.
Fortunately for the bulls, once a correction is over, the preceding trend resumes. The negative phase of WPC’s wave cycle could’ve ended in March 2020, and given birth to a fresh bull market. Indeed, the stock had more than doubled by July 2022. Alas, a new all-time record wasn’t meant to be. Following the recent drop, it is now evident that W.P. Carey ‘s retracement is evolving into a (W)-(X)-(Y) double zigzag. Let’s take a closer look at its structure on the daily chart below.
The first part of the double zigzag is, of course, a simple A-B-C zigzag in wave (W). In WPC’s case, wave C was much longer than wave A, but it is the structure that counts, not necessarily the proportions between the waves. Wave (W) was followed by another W-X-Y double zigzag in wave (X), where both W and Y are simple a-b-c zigzags. Wave ‘a’ of Y is a regular five-wave impulse, while wave ‘c’ was an ending diagonal.
If this count is correct, the selloff the stock is currently suffering through must be part of wave 3 of C of (Y). It can potentially drag the price below the bottom of wave (W) at $38.62. This puts bearish targets in the mid-$30s within reach, before the uptrend can finally resume. From the present level of just under $57 a share, that’ll be an additional ~40% drop.