The stock market is now about 30% down from its highs in the quickest onset of a bear market in history. Some stocks have been beaten down to fire-sale prices, and while there are certainly some to avoid, there are some that look like major bargains from a long-term standpoint.
With that in mind, here's why I'm keeping an eye on Bank of America (BAC 0.72%) and Store Capital (STOR 2.27%) as the market remains in a volatile state. While they could certainly be a roller-coaster ride for investors in the near-term, all three are financially solid enough to make it through the COVID-19 coronavirus pandemic and should be excellent stocks for long-term investors.
U.S. banks could be a long-term winner
It's easy to understand why bank stocks have been one of the worst-performing areas of the market in the downturn. Not only are plunging interest rates likely to cause bank profit margins to narrow significantly, but the virus response and economic impact of the outbreak are likely to cause demand for banking products and services (such as loans) to decline.
Well, after the Federal Reserve's latest action, banks took another leg down. The Fed's announcement of a massive quantitative easing program combined with slashing interest rates to zero is causing concern about the health of our financial system.
Here's the short version: Our banking system is fine. Steps were put in place after the financial crisis to ensure that our big banks can make it through a massive downturn (much deeper than we're likely to see, even if the outbreak gets worse). Bank of America has done a particularly good job of improving asset quality and the improving efficiency of its operations over the past decade or so. And while falling rates will certainly hurt the bank's interest margins, it will still be a highly profitable institution.
After the recent plunge, Bank of America is trading for just 76% of its book value, its lowest valuation level since 2016, and the bank trades for just over seven times its TTM earnings. 2020 may be a rough year for the bank, but it looks extremely attractive for long-term investors.
Not your ordinary retail stock
Most retail-related investments aren't having a good couple of weeks, and understandably so. Businesses that rely on people to go somewhere are getting hammered -- after all, people aren't really going anywhere they don't have to right now.
Retail real estate investment trusts, or REITs, are no exception. And that's why I'm looking at STORE Capital.
If you aren't familiar, STORE Capital (which is in all caps because it stands for Single Tenant Operational Real Estate) invests in net-lease properties, particularly those in the retail and service industries. However, there are two big reasons why STORE is different.
First, STORE Capital leases its properties to high-quality tenants on a net-lease basis. This means that tenants commit to long lease terms (10-15 years or more) with annual rent increases built in, and the tenants pay for taxes, insurance, and maintenance costs. And with 99.5% occupancy, income can't get much more predictable.
Second and more importantly, STORE's portfolio is full of properties whose tenants should be just fine over the long run. Restaurants are the largest part of the portfolio at 14%, which is likely a contributor to the stock's massive decline, but other large categories include early childhood education centers, auto repair businesses, pet care businesses, medical and dental offices, and other businesses that tend to stay in demand in good times and bad.
STORE Capital is now 45% down from its highs and is trading for less than 11 times TTM funds from operations (the REIT version of earnings). With a well-covered 6.4% yield, STORE is looking very attractive.
It won't be a smooth ride...
To reiterate, I'm not trying to call a bottom in either of these stocks. If the coronavirus pandemic gets worse or lasts longer than expected, they could certainly go down further. And whatever happens, expect a roller-coaster ride in the near term.
However, for long-term investors, these are two high-quality companies that are looking extremely attractive at their current prices.