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Market Update

Buffett Casts Vote of Confidence for Troubled REIT

Billionaire investor takes 5.1% stake in JDN Realty.

Once again, investors have flocked to follow the Oracle of Omaha.

In filings made after the market closed Friday, billionaire investor Warren Buffett disclosed that he has taken out a 5.1% stake in JDN Realty (JDN), an Atlanta-based developer of shopping centers. The troubled real-estate investment trust, or REIT, has suffered as a result of lawsuits stemming from charges of illegal compensation for some top executives that came to light earlier in the year.

Shares of JDN Realty rose more than 13% Monday to 12 1/16.

The stake represents the continuation of a move into REITs for the chairman of closely watched holding company Berkshire Hathaway (BRK.B). For example, it was reported last week that he had taken a 5.5% stake in Aegis Realty (AER), a New York-based REIT. As well, Buffett recently raised his stakes in two other REITs, MGI Properties (MGI) and Town and Country Trust .

At first glance, the stake in JDN Realty fits Buffett's well-known strategy of buying value stocks, or those whose price is low in relation to business fundamentals such as assets, sales, or earnings. JDN looks quite like the solid-but-beaten-down companies that he specializes in. Trading at a price/earning ratio of 7.1, far less than half the average P/E multiple for REIT stocks of 19.4, its sales have grown in the double digits for the past five years, which is one of the reasons it sports a Morningstar growth grade of A. As well, its Morningstar valuation grade, a measure of a stock’s fair value to its price, is A-plus, a full letter grade above the industry average of B-plus.

The lawsuits against JDN stem from the departure of its chief executive in February over charges of undisclosed compensation and securities fraud. As a result, JDN said, it would have to restate earnings for the past five years. The stock price dropped more than 40% on the news and languished there before Monday's revival.

Buffett's move into REITs may simply be another reflection of his aversion to today's investment darlings--tech stocks--but it also may signal an interest in an out-of-favor sector. REITs haven't exactly been burning up the charts recently, as demonstrated by the 3% return for the BBG REIT index on the year, which comes after an 11% drop for all of 1999. It remains to be seen whether investors follow him into the sector as a whole as much as they may his individual stock picks.