What Changes Once Coronavirus Passes… And What Doesn’t?

The following is an excerpt from What Changes Once Coronavirus Passes … And What Doesn’t?, originally published on Money & Markets.

I don’t often go to the mall. I tend to avoid them like the plague. But that’s nothing new. I will dislike the mall no more post-coronavirus than I did before.

I’m not alone. Americans are doing more and more of their shopping online. The coronavirus outbreak didn’t cause this shift, but it certainly helped to accelerate it. Once you get used to having packages magically appear on your doorstep, driving to a store feels cumbersome and inconvenient.

So, a lot of the market share gains by Amazon.com Inc. (AMZN) and others will likely be permanent once this is over.

Digging deeper, America is “over-retailed” with roughly five times the amount of store square footage per capita than the United Kingdom and six times the store square footage of France.

Americans like their space, and our cities are less densely populated. So, it makes sense that we have a lot more square footage. But five times more?

But you can’t buy everything online, nor would you want to. We still need stores for showrooms and for services. I can’t order a haircut or a tooth filling from Amazon, after all.

But at the margin, this means less demand for malls and for big-box retail properties. I mentioned over the weekend that I liked REITs at current prices. But I’m sticking with high-traffic retail like convenience stores and pharmacies and steering clear of malls.

I also have no plans to buy the dip in department store stocks. Best in class department stores like Nordstrom (JWN) will survive and thrive, even if it takes them a while to recover.

But there were plenty of retailers that barely escaped the last recession intact, and it’s hard to see them surviving this one. I think it’s safe to assume JC Penny (JCP) is toast. It’s hard to believe, but Sears still has nearly 200 open stores. It’s hard to see those surviving. Research site Macroaxis puts the probability of Dillard’s (DDS) coming under financial distress at about 27% and Kohl’s (KSS) at 42%. But this was based on company data before the coronavirus crisis hit. You can bet those numbers will look bigger once new quarterly data comes in.

To read the rest of the article, please see What Changes Once Coronavirus Passes … And What Doesn’t?

Value in the REIT Wreck

The following is an excerpt from With the US Economy in a Deep Freeze, Is There Value in the REIT Wreck?

REITs are normally a quiet corner of the market. Because they tend to pay high dividends, they’re a favorite of income-starved retirees.

Well, I’m not speaking in hyperbole when I say they got their heads bashed in last month. The Vanguard Real Estate Index ETF (VNQ), a popular way to track the sector as a whole, was down 44% at the lows. That’s bad, but individual stories get so much worse.

Consider Realty Income (O). This is as close to a bond as you can get in the stock market. The REIT owns a collection of high-traffic retail properties – things like pharmacies and convenience stores. There is nothing interesting or sexy about Realty Income or its properties, and that’s exactly the point. Its investors love the stock precisely because it’s boring and gives them no drama.

Realty Income — boring, stodgy, fuddy-duddy Realty Income — was down 55% at one point and is still down close to 50%.

This is a stock that has raised its dividend for the past 90 consecutive quarters — 23 years and counting — and sailed through the 2008 meltdown. And its shares were down by more than half.

I don’t expect widespread bankruptcies or long-term impairment across the REIT sector. Sure, some of the smaller, weaker players could fail, and I’d probably stay away from mall REITs given that malls were already in bad shape even before this crisis struck. I also believe a lot of these companies could end up having to cut their dividends, at least temporarily, if their tenants are unable to pay for a few months.

But the key here is temporarily. High-quality real estate that was in demand before the coronavirus blow-up will still be in demand a year from now.

If you’ve been waiting for your chance to snap up real estate at 2008-caliber prices, this is it. I don’t expect this volatility to disappear in a day, but if you’re willing to stomach it, you can buy a basket of solid REITs at prices we may never see again in our lifetimes.

To read the full article, see With the US Economy in a Deep Freeze, Is There Value in the REIT Wreck?

Ignore the Noise and Follow the Insiders — This Is What Sector They’re Buying

The following is an excerpt from a piece first published on Money & Markets.

I’m the first to admit I don’t know what happens next to stock prices. You could make a credible case that, while the economy might be in for its worst recession since the 1930’s Great Depression, the S&P 500 could hit new all-time highs by year’s end due to the flood of Fed stimulus coming down the pipe. That’s not a crazy statement.

But you could also credibly argue that the market should take another major leg down, as buybacks will be off limits for large swaths of the market for the foreseeable future and earnings promise to be awful.

Rather than try to guess — and let’s face it, it’s a guess — let’s instead take a look at what the insiders actually running America’s largest companies are doing.

Company executives and board directors aren’t geniuses. They’re regular people like you and me. They do, however, generally have a pretty good grasp of when their company shares are undervalued. While not necessarily market timers, they tend to be pretty good value investors. And to say they saw value in March would be an understatement.

To continue reading, see Ignore the Noise and Follow the Insiders — This Is What Sector They’re Buying.