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Wall Street Has Given Up on These 3 Stocks, and That's a Huge Mistake

By Jason Hall - Apr 12, 2020 at 6:01AM

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A mall operator, an oil company, and a hotel owner might seem like investments to avoid, but there's deep value for disciplined investors.

Oil stock? Nobody's traveling. Hotel stock? Nobody's traveling. Mall stock? Nobody's shopping! 

I get it. It's obvious why investors have turned their backs on Phillips 66 (PSX -0.93%)Tanger Factory Outlet Centers (SKT -1.24%), and Ryman Hospitality Properties (RHP 0.45%). The COVID-19 crisis has ground the economy to a halt, and few industries are more affected than hospitality, discretionary consumer retail, and oil. 

That's why even with stocks having recovered some of their losses -- the S&P 500 is down about 18% from the peak, after falling almost 35% at one point -- these three are serious laggards. They're down 45%, 57%, and 64% respectively at recent prices, and there could be more pain to come since it could be well into the summer before the economy is able to open up in anything close to a meaningful way. 

Black arrows pointing right, with one red arrow pointing left.

Time to zig while Wall Street zags. Image source: Getty Images.

Sure, there's little doubt that all three industries will suffer and that the next quarter or two and maybe longer could be brutal. But these companies have the balance sheet strength and skilled management to ride things out, and high-quality businesses that will prove resilient and profitable when life returns to normal. 

The right part of the oil business

As much as airlines and the cruise industry are in major trouble, there's plenty of reason to point at the oil and gas industry as being the most downtrodden right now. Not only is it dealing with a massive drop in demand as billions of people stay home, but Saudi Arabia's war for market share against Russia and U.S. shale has also sent oil prices down more than 60% in the past three months. 

Even a pact to reduce output -- word is a group of state-controlled producers have agreed to cut production by 10 million barrels per day -- won't be enough to bring supply and demand into alignment. Even with big cuts, we could go several months where 10 million to 15 million barrels of excess oil are produced every single day. 

So why is Phillips 66 on this list of overlooked stocks? Because it checks off all the right boxes as a company that should prove able to survive the worst of the oil crash, and then thrive during and after the market recovery. 

Fuel dispensers at a gas station.

Image source: Getty Images.

Phillips 66 operates refining and fuel marketing businesses that focus on oil and refined products like gasoline and jet fuel. There's little doubt that it will report at least one quarter of losses from this segment. Refined products demand is going to crater. But its petrochemicals business is likely to prove more resilient, producing feedstocks that go into products like fertilizer and plastics for the healthcare and consumer staples industries. Moreover, the midstream business is more focused on natural gas than oil, and that should give it even more insulation from falling oil demand. 

It also has a strong balance sheet, with more than $5 billion in cash and low-cost debt it can access quickly to cover any cash flows shortfalls over the next few months, and a very skilled management team that can navigate even this environment will the very best of them. With shares down almost 50% from the all-time high, Phillips 66 is a rare oil stock that I think is worth buying now. 

The best properties for the recovery (and these two companies can outlast the recession)

Tanger Factory Outlets and Ryman Hospitality Properties share a lot in common right now, in that they own real estate assets that are for all intents and purposes, closed for business for the foreseeable future. Tanger's outlet malls feature retail tenants that sell discretionary goods, while Ryman owns the five Gaylord Hotels (one in a joint venture) which are all closed for the foreseeable future. The market has responded as one would expect, sending shares of both real estate investment trusts down well over 50% at recent prices.

Their prospects, at least over the next few months, are uncertain at best. Ryman will earn almost no revenue while its hotels are closed, while more than half of Tanger's properties are under government restrictions on what kinds of stores can even be open. 

Empty hotel lobby.

Image source: Getty Images.

But when we look beyond that, Tanger and Ryman are in the right part of retail and hospitality to recover relatively quickly. Tanger was reporting strong sales and traffic counts at its high-demand discount outlets before the COVID-19 pandemic, and discount shopping has proved more resilient from economic shocks in the past. For Ryman, a large portion of its business is tied to corporate events, conferences, and conventions that are often planned years in advance. No other operator outside Las Vegas owns more valuable convention properties than Ryman's Gaylord hotels and resorts. 

Most importantly for the near term, both Tanger and Ryman look to have sufficient liquidity to ride out the ongoing recession. Tanger recently drew down the remaining credit on its $600 million lines, giving it more than enough cash to cover operating expenses, service debt, and even maintain its dividend for multiple quarters (though the board has been clear that it will reevaluate the dividend each quarter). Management also agreed to take pay cuts during the downturn to help maintain adequate capital. 

Ryman's balance sheet is in even better shape, and that's a good thing. Tanger could see restrictions on its properties start being lifted gradually in the months ahead, but it might be 2021 before we see any big conventions or businesses schedule conferences at a Gaylord property. The good news is, the company should have sufficient capital to make it more than a year without having to tap any additional liquidity. But if push does come to shove, the company would be likely to have little trouble securing more cash. That's a benefit of owning some of the most desirable and valuable resort properties in the world. 

Overlooked value for patient investors

As much as investors have turned their backs on Phillips 66, Ryman Hospitality, and Tanger Factory Outlets, the next few months -- and possibly the rest of 2020 -- could be painful. It's not out of the question that, as the depths of the recession become more apparent, we could see the stock prices for all three fall even further. Phillips 66 and Tanger both were down more than 62% only two weeks ago, while Ryman shares were down a brutal 85% in mid-March. 

This is where patience comes into play. These aren't investments where you should expect to make a quick buck: It could take a few years for the economy to fully recover. But that patience should reward investors in these three overlooked businesses with immense gains. 

Jason Hall owns shares of Phillips 66, Ryman Hospitality Properties, and Tanger Factory Outlet Centers. The Motley Fool owns shares of and recommends Ryman Hospitality Properties. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tanger Factory Outlet Centers, Inc. Stock Quote
Tanger Factory Outlet Centers, Inc.
$17.60 (-1.24%) $0.22
Phillips 66 Stock Quote
Phillips 66
$89.16 (-0.93%) $0.84
Ryman Hospitality Properties, Inc. Stock Quote
Ryman Hospitality Properties, Inc.
$94.14 (0.45%) $0.42

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