The stock market is hovering just below all-time highs, but not all stocks are performing well. Some stocks have fallen out of favor in recent months and years because of headwinds that are industry-specific or because of ambitious new business ventures that are yet to become profitable. Tanger Factory Outlet Centers (SKT -1.43%) and Zillow Group (Z -0.49%) (ZG -0.40%) are two such stocks, so here's why even though Wall Street has given up on them, you shouldn't do the same.
The right kind of retail stock to own
Tanger Factory Outlet Centers isn't a favorite among investors right now. Out of 10 analysts covering the stock, only one has the stock rated anywhere higher than hold. More than 50% of Tanger's outstanding shares were sold short as of Aug. 30 despite the fact that the stock has lost 58% of its value over the past three years.
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Even so, Tanger is one of my favorite ways to play the current retail challenges. It's no secret that there has been a wave of bankruptcies and store closures in the retail industry, and these aren't likely to be done just yet. However, outlet retail is different. These are retailers that offer bargains from popular brands that the e-commerce giants typically can't match -- and the deals aren't widely publicized. There's a "treasure hunt" experiential component to outlet shopping, which should keep foot traffic high at outlet properties.
To illustrate this, consider that Tanger's occupancy has never dropped below 95% (it's currently at 96%), and the company has been able to raise its dividend every year since its 1993 IPO. And, Tanger's tenants have seen sales per square foot rise over the past year.
There's also a lot of room for growth in the outlet shopping space. Tanger has only 39 locations so far, and it's estimated that all of the quality outlet space in the U.S. is less than 1% of the total U.S. retail square footage. In fact, after a few years of cautiously pumping the brakes on growth, Tanger appears to be ready to expand again. The company is exploring a potential new Tanger Outlet Center in Nashville, just to name one example, and with such an underpenetrated market opportunity, I wouldn't be surprised to see lots of growth in the outlet industry over the coming years.
Tanger currently trades for just over seven times its expected 2019 funds from operations (the REIT equivalent of "earnings") and pays a well-covered 8.6% dividend yield. Now could be a great time for patient investors to add this unique retail stock to their portfolio. In fact, Tanger is one of the stocks I recently bought even more of for my own portfolio.
Don't lose sight of long-term potential
I've often said in the past that real estate is an industry that's begging to be disrupted. Real estate has sky-high commissions, a long and complicated closing process, difficult financing procedures, and more. And Zillow is leading the charge to disrupt it.
Zillow's core business of providing services to real estate professionals is doing quite well, as the company leverages its 180 million unique monthly visitors to generate advertising revenue and other types of income. Zillow has practically become synonymous with online real estate listings, so it's fair to say that the disruption in this area has been a success.
Recently, Zillow is aiming to disrupt more aspects of the real estate industry -- mortgages and flipping houses.
On the flipping houses side of the business, known as Zillow Offers, the company makes all-cash offers to homeowners, and then makes repairs and sells the home. The company hopes to do this at a rate of 5,000 homes per month within the next five years. However, there are big investor questions as to whether Zillow can make this a profitable business at scale, and so far the answer has been no. That's the main reason the stock has been beaten down recently.
On the mortgage side of the business, Zillow acquired Mortgage Lenders of America in 2018, and announced in April that it was rebranding the company as Zillow Home Loans. The idea here is that Zillow can now originate mortgages itself without a middleman. This is likely to be a higher-margin business, and with Zillow's user base, I wouldn't be surprised to see this become a huge income stream for the company.
However, Zillow has been a terrible performer lately, due mainly to profitability concerns surrounding its homebuying efforts. Since the beginning of August, Zillow has lost 35% of its value due to such concerns, but if you believe in the long-term disruptive power of Zillow's business, now could be the time to buy.
Still two great long-term stocks
To be perfectly clear, I'm a fan of these businesses for the long term. However, there could certainly be some near-term headwinds that cause volatility. For example, if more high-profile retail bankruptcies are announced or Zillow's homebuying business remains unprofitable for a while, I'd completely expect some short-term pain here. With that in mind, I'm confident that investors who have a time horizon of five to 10 years (or more) will be happy they decided to stick with these stocks.
