A few months ago, the stock market plunged into bear market territory quicker than ever before as the COVID-19 pandemic swept the globe. Since then, the rebound has been dramatic. In fact, the S&P 500 is just a few percentage points away from turning positive for 2020 as I write this.
Even with the impressive recovery, that doesn't mean that there aren't any cheap stocks worth considering. Here's why long-term investors with high risk tolerance might want to take a closer look at beaten-down bank stock Wells Fargo (WFC -0.56%) and outlet center REIT Tanger Factory Outlet Centers (SKT 0.53%)
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A beaten-down turnaround play that could pay off
Wells Fargo hasn't exactly been a standout in the financial sector. Before the COVID-19 pandemic, it was rocked by numerous scandals (including the infamous "fake accounts" scandal), and the Federal Reserve slapped the bank with an unprecedented penalty that prohibited it from growing during what was arguably the best growth environment for banks in over a decade. From the time that news of the fake accounts scandal broke in September 2016 through the beginning of 2020, Wells Fargo's stock underperformed the Financial Select Sector ETF (XLF -0.02%) by a staggering 79 percentage points.
Then the pandemic happened. Obviously, the coronavirus created tremendous uncertainty for banks. With no way to know how long the economic shutdown would last, how bad unemployment will get and for how long, and when government support will dry up, banks are bracing for big loan losses. In the first quarter alone, Wells Fargo added $3.2 billion to its loan loss reserves, and management recently said that might not be enough.
Many of Wells Fargo's big-bank peers have benefited from their large investment banking businesses, many aspects of which tend to do better in turbulent times. This isn't a major focus for Wells Fargo, so it has continued to underperform its peers. In all, since September 2016, Wells Fargo has fallen by nearly 40% and now trades for a rock-bottom valuation of 28% less than its book value.
With all of that in mind, now could be a smart time for long-term investors to add Wells Fargo to their portfolio. The bank has a solid track record of responsible lending, and its new management is doing an excellent job of executing on the company's transformation. And in the meantime, patient shareholders will get a handsome 7.2% dividend yield.
One retail stock you shouldn't avoid
Many investors are hesitant to invest in anything related to retail, and understandably so. But I'm taking a closer look at Tanger Factory Outlet Centers and may add to my position if it stays near its current price level.
If you aren't familiar, Tanger is a real estate investment trust, or REIT, that owns and operates 39 outlet malls throughout the U.S. and Canada. As the pandemic worsened in March, substantially all of Tanger's properties were closed.
But a recent update by the company certainly caught my attention: 72% of stores at Tanger's outlet malls had reopened as of June 14. And at Tanger's outlets in locations where retail has been allowed to reopen for at least 30 days, weekly customer traffic exceeds 90% of 2019 levels. That's very impressive.
While profitability will likely be nonexistent for at least the second quarter, Tanger has $433 million in cash on hand and has suspended its dividend temporarily to ride out the tough times.
Once the pandemic is over, it wouldn't be surprising to see Tanger start to grow again. Outlet retail is still a relatively small part of the overall retail landscape and has more staying power in an e-commerce disrupted world than most other types. The "treasure hunt" aspect of outlet shopping creates an experiential component, and outlets often have bargains that simply cannot be found online. If the company's recent traffic data is any indicator, there is no shortage of demand for outlet shopping, and there could be plenty of opportunities to expand in the years ahead.
Cheap for a reason (at least for now)
Both of these stocks still have tons of uncertainty, which is why they are still very cheap relative to pre-pandemic levels. Both are plays on the reopening of the economy; if reopening goes smoothly and the U.S. economy recovers quickly, they should do just fine. But that's a big "if" right now.
With that in mind, it is reasonable to expect quite a roller coaster ride as the pandemic continues to play out. While I'm confident that both companies will generate excellent long-term returns, it's important to realize these are high-risk stocks with high-reward potential. Invest accordingly.
