Many investors are hesitant to invest in anything related to brick-and-mortar retail, and given the surge of e-commerce and wave of store closures and bankruptcies in the industry, who could blame them? However, it's important to realize that not all retail investments are in the same boat, and the recent carnage in the sector has produced some excellent bargains for patient long-term investors.
The biggest and best retail property portfolio in the world
Chances are you know of a mall that used to be busy. There are many shopping malls in the United States that have been absolutely destroyed by retail bankruptcies and store closures, and their owners are in big financial trouble.
However, when it comes to malls, Simon Property Group is in a league of its own. The company, which is one of the largest real estate investment trusts (REITs) in the world, owns a massive portfolio of some of the best malls in the industry. In fact, Simon owns five of the 10 most valuable malls in the U.S., some of which are worth several billion dollars each.
Simon differentiates itself by providing experiences shoppers are willing to visit in person. This includes things like modern dining options, entertainment venues, hotels, and more. For example, Simon's Arundel Mills Mall near Baltimore features the Live! Casino and Hotel, a Dave & Buster's, a megaplex theater, a Medieval Times dinner theater, and more. It also has been actively adding nonretail elements like hotels, apartments, and office space in anchor space formerly occupied by Sears stores. Simon's massive size and financial flexibility gives it a big advantage when it comes to keeping up with changing retail trends, so it should have no problem remaining a step ahead of the competition.
The proof is in the numbers. Over the past year, Simon's retail tenants reported sales growth of 3.5%, not a decline. However, because of the pressure on all things retail, Simon's stock price has dropped by 15% over the past three months and it now has a well-covered 5.6% dividend yield for investors patient enough to hold on as the retail industry evolves.
Lots of hidden value
To be clear, Macy's recent financial results haven't been great. For the second quarter, Macy's missed earnings expectations by a wide margin and revenue declined slightly year over year. Plus, the retailer lowered its full-year guidance.
Having said that, there's reason to believe Macy's (and its stock) will turn things around. The company is upgrading 100 of its highest-performing stores, starting a subscription-based clothing service, and launching several pilot programs, such as a clothing resale marketplace within select stores. Plus, it's important not to overlook the value of Macy's real estate assets -- the company owns the majority of its buildings, including its massive flagship Manhattan location. Even under the most conservative valuation methods, Macy's real estate assets alone are worth far more than the current enterprise value of the company.
Even with its lowered guidance, Macy's trades for the fire-sale valuation of just 5.3 times expected 2019 earnings and its well-covered dividend translates to a yield of over 9.5%. While its turnaround won't be immediate and there's likely to be more volatility ahead, there's a lot of value here that could be unlocked for patient long-term investors.
These won't be low-volatility stocks
This shouldn't come as a surprise, but it's important to realize that these stocks are likely to be rather volatile for at least the next few years as the retail space continues to evolve. However, these are two companies that are in a great position to generate serious long-term value for investors with the patience and risk tolerance to ride out the retail storm.