Market volatility can certainly be scary. Nobody enjoys watching the value of their investments go down, then up, and then down again repeatedly. However, volatile markets can be the source of some excellent opportunities for long-term investors.
One of my favorite ways to invest during volatile market times is to focus on companies with tremendous growth potential that are facing short-term headwinds. Three companies that are in this category right now are investment banking giant Goldman Sachs (NYSE:GS), store credit card issuer Synchrony Financial (NYSE:SYF), and real estate investment trust Seritage Growth Properties (NYSE:SRG). Here's why these stocks could be worth a closer look.
Tremendous potential and cheap valuation
The financial sector has been a market laggard, and investment banking giant Goldman Sachs has been among its worst performers. So far in 2018, Goldman's stock price has fallen by nearly 19%.
While much of this is due to financial-sector weakness, the latest (and most dramatic) downside move can be attributed to news that Malaysia is attempting to recoup $600 million in fees it paid to Goldman as part of a bond investment fund that went bad.
Now, whether Goldman actually ends up paying back the $600 million remains to be seen, but it's important to realize that legal risk is a normal part of the banking world and that even if Goldman does end up on the losing end, this is a short-term problem.
From a long-term perspective, Goldman is still a monster when it comes to M&A advising, equity and fixed-income underwriting, and trading. And I don't think the market is truly appreciating the potential of Goldman's rapidly growing consumer banking business. The Marcus by Goldman Sachs platform has been around for just over two years and has already made $4 billion in consumer loans, and its high-yield deposit platform has grown rapidly as well. The company recently announced it would develop a wealth-management product, and CEO David Solomon has mentioned several potential areas for expansion, including credit cards, mortgages, insurance, checking accounts, and more.
After the declines, Goldman is trading for just over its book value, making it one of the cheapest large U.S. bank stocks. Now could be a great time to take advantage.
High profitability clouded by short-term headwinds
Another company facing a temporary bump in the road is Synchrony Financial, a major store credit card issuer and online bank.
Here's the issue. Synchrony recently announced that its long-standing partnership with Walmart (NYSE:WMT) will be ending shortly, and this represents a large chunk of the bank's loan portfolio. In addition, Walmart has filed a lawsuit against Synchrony for $800 million, claiming that the bank used loose underwriting practices, and the co-branded cards had more defaults than Walmart anticipated.
However, don't let this distract you from an otherwise excellent business. Synchrony's store credit card business has excellent interest margins, and the company's online savings platform is growing rapidly, which should keep providing low-cost funding for expansion. In fact, the 14% year-over-year deposit growth Synchrony recently reported matched its 14% loan portfolio growth.
Synchrony has said that it should be able to fully replace its lost Walmart revenue when the agreement expires in mid-2019, and with its current growth rate, I have no reason to doubt that. Synchrony appears to think its stock is very cheap right now, as the company bought back nearly 4% of its outstanding shares in the third quarter alone. I agree.
A long-tailed real estate opportunity
If you aren't familiar, Seritage Growth Properties is a real estate investment trust, or REIT, that was created in 2015 from a portfolio of Sears' (NASDAQOTH:SHLDQ) real estate assets. Well, Sears is still the company's primary tenant by far, and Sears recently declared its long-anticipated bankruptcy, sending Seritage shares plunging.
The general idea behind Seritage's business model is to gradually redevelop its Sears-occupied properties into modern, mixed-use real estate.
So far, the plan is working. Although Sears and Kmart occupy about 70% of the REIT's square footage, the tenants in already-redeveloped properties pay significantly higher rent. In fact, the percentage of the company's revenue that comes from non-Sears tenants has grown from about 20% at the time of the 2015 spinoff to almost 70% now. And the company is just starting to lease up some of its major assets right now, as my colleague Adam Levine-Weinberg recently pointed out.
If you're worried about Seritage's ability to sustain itself through the transitional period, consider that Warren Buffett-led Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) recently entered into an agreement to loan Seritage as much as $2 billion. Berkshire generally doesn't loan its money unless management is virtually certain that it will be paid back, so this is a massive vote of confidence. (Note: Both Goldman Sachs and Synchrony are components of Berkshire's stock portfolio, so Buffett and his team appear confident in all three businesses discussed here.)
Approach these as long-term investments
To be perfectly clear, I don't think these three stocks will necessarily soar in the near term. In fact, if the market volatility continues to pressure stocks, they could certainly fall further.
However, these are three excellent businesses with attractive growth potential that should do extremely well over the long run. In a nutshell, don't buy them because of what they'll do for the rest of 2018 or even over the next year or so. If you decide to add one of these to your portfolio, do it because of what the stock could do over the next 5, 10, or 20 years.