As the COVID-19 pandemic continues, some businesses are not doing well. For example, banks are bracing for billions of dollars of losses as the elevated unemployment rate could cause a spike in consumer loan defaults. And malls not only had to close for several months as the pandemic worsened, but many mall retailers were struggling to survive even before the pandemic.
Having said that, it could be an excellent time for patient long-term investors to pick up shares of some of the best-in-breed companies in businesses like these. That's why I recently added shares of Bank of America (BAC 3.35%) and Simon Property Group (SPG 0.05%), and why you may want to add them to your radar as well.
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It's a terrible environment for banks... for now
While the banking business is obviously more complex than I can describe in a few sentences, at the core, the idea is pretty simple -- banks take in deposits, lend money to customers, and profit from the interest they collect on those loans.
With that in mind, it shouldn't be a big surprise to hear that this is an awful environment for banks to make money. Not only are interest rates at record lows, but the COVID-19 pandemic could lead to a surge in loan charge-offs if elevated unemployment lasts for a long time. In fact, Bank of America set aside an additional $3.6 billion in the first quarter alone to build its loss reserves, and even that might not be enough.
However, there are a few things to keep in mind. For one thing, interest rate fluctuations are a natural part of the economy. While the current low-rate environment is a bit extreme, it won't last forever. And banks can still earn lending profits during low-rate environments (mortgage and auto loan rates aren't at zero). Plus, banks are well-capitalized institutions these days, and there's no reason at this point to think the loan losses will be anything Bank of America can't handle.
Bank of America is my preference in the sector because of its low valuation and impressive transformation over the past decade. The company has done a fantastic job increasing profitability and efficiency and has emerged as a leader in banking technology. At the current price of 10% less than its book value, it looks like a compelling long-term entry point.
The best-in-breed mall operator is adapting well to the new world of retail
It's a terrible time to be a mall operator. Many mall-based retailers were struggling before the pandemic hit, and we could certainly see a new wave of bankruptcies and store closures as the full economic effects of the pandemic continue to develop.
However, when it comes to malls, Simon is in a class of its own. It owns a portfolio of more than 200 properties, many of which are among the most valuable pieces of retail real estate in the world. Simon's properties include ultra-high-end malls under the Mills brand name and others, as well as the largest outlet shopping portfolio in the business under the well-known Premium Outlets brand.
Simon is in the middle of a long-term transformation of its properties into mixed-use destinations, incorporating residential, hotel, entertainment, office, and other non-retail elements that bring in foot traffic to its retail space. And a wave of retail bankruptcies could actually work in Simon's favor -- the company has already (with partners) acquired Aeropostale and Forever 21, and is in talks to acquire J.C. Penney.
It's unfair to judge pretty much any company by its 2020 numbers, but in 2019 Simon's retail tenants actually reported sales increasing by nearly 5% year-over-year on a per-square-foot basis. With shares down more than 50% year-to-date, Simon could be a hidden long-term value play in the beaten-down retail sector.
Don't expect a smooth ride
You may not be thrilled with these stocks a month or even a year from now. As long as the economic uncertainty surrounding the COVID-19 pandemic persists, I expect them to take investors on quite a roller coaster ride.
However, the point is that these are two well-run businesses with durable competitive advantages, and they should do just fine over the long run. I have personally added shares of both stocks to my portfolio in recent months, and I'm confident that I'll look back in a decade and be extremely glad that I did.
