3 Hot Stocks to Buy in September

With the stock market near record high levels, many stocks look rather expensive right now. Fortunately, there are some exceptions. Here are three stocks that look particularly attractive due to subpar performances thus far in 2017, and all of which pay above-average dividends and have lots of upside potential.

Data source: TD Ameritrade. Dividend yields and YTD performance current as of 9/18/2017.

Image Source: Getty Images.

The best in a beaten-down industry

Mall real estate investment trust Simon Property Group is the largest REIT in the market. The company's portfolio consists of about 230 properties, many of which are operated under the well-known brand names Premium Outlets and The Mills.

First off, it's no secret that many retailers are struggling. Brick-and-mortar retail is facing intense competition from online retailers, and many physical retailers aren't doing well -- particularly those that sell full-retail discretionary products. That's why retail REITs such as Simon haven't performed well.

However, Simon's properties are doing fine. Outlet retail works well in any economic climate, and Simon has invested considerable resources to ensure that its malls remain top-notch shopping destinations with state-of-the-art amenities. And the company has done an excellent job of adapting to consumer preferences with more modern anchor stores (such as Dave & Buster's, Legoland Discovery Center, and 365 by Whole Foods to name a few) and a greater variety of fast-casual dining options.

The company's earnings (FFO per share) have grown by 7.6% year over year, and its properties have an occupancy rate of more than 95%. Since 2010, Simon's dividend has been increased by more than 150%, and there's no reason to believe the company's streak of dividend raises is in jeopardy.

Take advantage of temporary issues

The banking sector has been one of the best-performing areas of the market over the past year or so, but Wells Fargo has been a notable laggard. Even including the massive post-election rally in bank stocks, Wells Fargo has barely budged.

In short, Wells Fargo has been plagued by scandals over the past year that have hurt investor confidence in the company. The largest of these is the infamous fake-accounts scandal, in which as many as 3.5 million accounts were improperly opened to meet ambitious sales targets. In addition, Wells Fargo has also been accused of charging over 800,000 auto loan borrowers for insurance they didn't need, making unauthorized changes to home loans, and improperly raising customers' mortgage rates. And this isn't even an exhaustive list.

As a result of these wrongdoings, Wells Fargo's business could certainly suffer. However, the point to keep in mind is that none of these should cause permanent damage to the bank. Wells Fargo has made leadership changes and has completely reworked its sales culture. It may take a little while for these scandals to blow over, but they will eventually. After all, these scandals pale in comparison with the financial crisis-era wrongdoings by banks, and most banks have been able to overcome their costly mortgage-related legal issues.

At the end of the day, Wells Fargo is still one of the most profitable banks in the U.S., with an excellent track record of strong asset quality and efficient operations. Now could be a smart time to buy this long-term winner at a discount.

Hotels that work in any economy

Apple Hospitality Group is a real estate investment trust that specializes in "select-service" hotels. These are the middle of the hotel market, offering more services than no-frills hotel brands, but without the extensive amenities offered by luxury resorts and hotels. Homewood Suites by Hilton, Courtyard by Marriott, and Residence Inn are examples of select-service hotel brands.

The company owns 235 hotels in 33 states, virtually all of which fit into the select-service or extended-stay categories. All are operated under various Hilton or Marriott brand names (including the three mentioned in the previous paragraph). The company's properties are newer and more desirable than those run by competitors, with an average effective age of just four years, and Apple Hospitality regularly reinvests in its properties to maintain an advantage.

While hotels are certainly not a recession-resistant form of real estate, select-service hotels tend to fare better than other types. As CEO Justin Knight told me in a June 2017 interview, "In past recessions, consumers who generally stay at higher-end properties become more value-conscious, which benefits us."

Finally, while Apple Hospitality REIT's 6.4% dividend yield may sound rather high, it's important to point out that it translates to a modified FFO payout ratio of less than 70% for the first half of 2017, a rather low payout ratio for a REIT.

Three long-term winners

To be clear, I don't expect any of these three to be low-volatility stocks, especially over short periods of time. Just to name a few "what-ifs," retail headwinds could potentially get worse, there could be additional scandals revealed involving Wells Fargo, or the economy could slow down and hurt hotel spending. The point is that there are plenty of things that could cause these stocks to go down further in the near-term.

However, these are three rock-solid businesses, and investors who buy these stocks with a long time horizon in mind should do well. Just don't panic if there are some bumps on the road along the way.