Real Estate

Tech Stocks or Real Estate?

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Written by Daniel Da Costa at The Motley Fool Canada

As interest rates have risen rapidly over the last year in an effort to cool inflation, stocks across many sectors have been impacted. But while many companies have seen some impact, there’s no doubt that some of the cheapest stocks, and consequently some of the best stocks to buy now, are tech and real estate stocks.

Rising interest rates hurt the valuation of tech stocks immensely. Not only have smaller, up-and-coming tech stocks seen their valuations plummet, but even high-quality companies like Shopify (TSX:SHOP) sold off by more than 80% from previous highs.

Meanwhile, many real estate stocks were hit as well. Rising interest rates naturally impact the value of real estate assets. So many REITs have seen their net asset values fall over the last year.

Furthermore, surging inflation raised the operating costs of these real estate stocks considerably, leading to concern from investors that profitability could be affected.

So with both tech and real estate stocks offering investors massive discounts in the current environment, you may be wondering which is the best to buy now.

For most investors, that will depend on how well your portfolio is diversified. But assuming you’re well diversified and now looking to take advantage of the opportunity this economic environment has created, let’s look at which stocks are the better buy in 2023, real estate or tech.

Are tech stocks the best to buy in 2023?

With many tech stocks offering attractive long-term growth potential, they are some of the best investments you can own. Whether they are the best stocks to buy in 2023, though, is a different story and depends largely on the industries they serve.

For example, Shopify is an e-commerce stock. So, in addition to seeing its value plummet as interest rates increased, there is also concern that its revenue could be lowered by reduced consumer spending.

Another factor to consider is that many tech stocks are highly volatile, and most of these stocks aren’t considered defensive. Therefore, while uncertainty remains high, it seems likely that tech stocks could trade undervalued for some time before recovering.

Real estate stocks are excellent long-term investments

While real estate stocks are cheap too, many of these stocks, like Canadian Apartment Properties REIT (TSX:CAR.UN), have highly defensive operations. And consider that these stocks have continued to earn strong cash flow, even as the economic environment has shifted. So, it wouldn’t be shocking to see them continue to recover this year, making them some of the best stocks to buy in 2023.

As early as the first quarter of 2022, CAPREIT was being impacted by surging inflation. Many residential Canadian REITs saw operating costs increase owing to higher natural gas prices.

By the second quarter and third quarter, operating expenses were up more than 5% and 6%, respectively, year over year, which led to significant growth in rental rates.

And now, with inflation starting to cool off, in addition to energy prices coming back down to earth, the increasing rent prices are driving profitability up rapidly for CAPREIT, giving it a tonne of potential in this environment.

Furthermore, many real estate stocks are much more reliable than tech stocks. CAPREIT is a dividend aristocrat with over a decade of consecutive increases to its distribution. Thus, real estate stocks that you can buy undervalued are among the best stocks to add to your portfolio in 2023.

In the fourth quarter of 2022, CAPREIT’s same-property net operating income was up a whopping 7% year over year, largely due to declining costs and rapidly rising rental rates.

So, there are plenty of tech stocks worth considering, and these companies have significant long-term growth potential. But if I had to choose just one sector to invest in for 2023, I’d choose reliable defensive growth stocks from the real estate sector, such as CAPREIT.

The post Better Buy in 2023: Tech Stocks or Real Estate? appeared first on The Motley Fool Canada.

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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.