To say that 2020 has had its ups and downs would be a brutal understatement to the investment community. That's because Wall Street has crammed in about 10 years' worth of volatility in a span of six months. We witnessed the quickest and steepest bear market decline on record, which was followed by the fastest rally to new highs from a bear-market bottom in history.
But no matter how volatile things may seem, history has conclusively shown that buying great stocks during periods of fear and panic, as long as you have a long-term mindset, is almost always a smart move. Over time, each and every stock market correction is eventually put in the rearview mirror by a bull market rally.
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The volatility we've been experiencing in 2020 has been especially attractive to millennial and/or novice investors.
Online investing app Robinhood has signed up millions of users over the past couple of years, many of whom are relatively young or new to investing. Robinhood's commission-free platform and offer of free shares of stock for creating an account have been powerful tools to lure in new investors.
But Robinhood has failed to provide the tools and knowledge necessary for its millions of millennial and novice investors to succeed. Rather than thinking long term and allowing compounding to work to their advantage, many of the platform's members are day trading, chasing penny stocks, or buying awful companies.
This focus on the short term has caused Robinhood investors to miss out on some truly great companies. Though the ownership statistics available are a few weeks old, it's pretty evident that the following three great stocks are currently being overlooked by Robinhood members.
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Intuitive Surgical
Although its share price -- more than $700 -- might scare some folks away, the ability to buy fractional shares on Robinhood makes the lack of love for surgical-system developer Intuitive Surgical (ISRG -1.69%) inexcusable. Through mid-August, only around 6,400 members had a position in the dominant maker of robotic surgical systems.
How dominant, exactly? How about 5,764 of its da Vinci surgical systems have been installed worldwide over the past 20 years, which is far more than any of its competitors combined. What's more, some of its top competitors have run into delays in launching their systems, which will only strengthen Intuitive Surgical's rapport with the medical community.
The beauty of its operating model is that it's built to see margins improve over time. Early on, the sale of the pricey da Vinci system ($500,000 to $2.5 million) accounted for most of the company's revenue. But these machines are intricate and costly to build, meaning margins associated with their sale aren't too great. As time has progressed and the company's installed base has grown, the percentage of revenue derived from instrument sales with each procedure, as well as regular servicing, has increased dramatically. These channels of revenue offer considerably better margins than da Vinci system sales.
Put simply, investors are ignoring the surgical-care stock of the future, which happens to offer a sustainable double-digit growth rate.
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AvalonBay Communities
Another great stock getting far too little attention from Robinhood investors is apartment-focused real estate investment trust (REIT) AvalonBay Communities (AVB 1.16%). The company, which offers a delectable 4% annual yield, is owned by only 1,400 members on the platform.
To some extent, I can understand why apartment REITs like AvalonBay aren't getting any love. Robinhood investors love volatility, and that's not something you'll typically see from a REIT. To boot, rising levels of rental delinquency due to the coronavirus pandemic threaten to hurt the earning potential of residential REITs.
But AvalonBay Communities has a trick up its sleeve. Specifically, its apartment communities tend to be on the upper-middle to high end of the pricing scale, which means its target audience tends to be upper-middle-income individuals and families. Renters who have higher incomes are historically less likely to shift their consumption habits during periods of economic unrest. Admittedly, the pandemic is a bit more serious than an economic hiccup, but the key point here is that AvalonBay's clientele should help it weather this downturn better than its peers.
AvalonBay has also been one of the top-performing residential REITs in terms of occupancy rate for years. Even now, with the unemployment rate soaring, the company collected rental revenue on 92.8% to 93.9% of its units between the end of April and the end of July. This is a time-tested REIT that's being shown little love by investors.
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U.S. Bancorp
Robinhood investors are also overlooking a number of big-time bargains in the banking industry, such as regional banking giant U.S. Bancorp (USB 2.56%). In my view, it's mind-boggling that only around 11,500 members held a stake in U.S. Bancorp in mid-August.
Like most bank stocks, U.S. Bancorp is going to see its earnings potential constrained a bit over the coming quarters as interest income declines and loan delinquency rates rise. This double whammy on bank stocks is a direct result of the pandemic.
However, U.S. Bancorp is also well known for running circles around money-center banks in terms of its return on assets (ROA). This is a company that's avoided riskier derivative investments that have sunk big banks during periods of economic weakness. Having stuck with the bread-and-butter of banking (i.e., growing loans outstanding and deposits), U.S. Bancorp has used its operating efficiency to its advantage and consistently generated an ROA of 1.6% prior to the pandemic. For context, most banks are pretty happy when they hit an ROA of 1%.
Furthermore, the bank has done a bang-up job of improving digital engagement. Over the past two years, the total number of its customers who are active either online or via mobile rose 7 percentage points to 77%, with a huge jump in total loan sales completed either online or via mobile (25% in Q2 2018 versus 46% in Q2 2020). Because digital transactions cost only a fraction of in-person transactions, U.S. Bancorp has been able to shutter branches in order to reduce its noninterest expenses.
At roughly 26% above its book value, U.S. Bancorp is as cheap as it's been since early 2009.
