Please ensure Javascript is enabled for purposes of website accessibility

1 Cheap Stock to Buy in 2021

By Reuben Gregg Brewer - Jan 21, 2021 at 7:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Retail-related stocks had a tough 2020, but this cheap stock should survive and thrive once the world gets past the coronavirus.

Years from now, when the world looks back at 2020, the big story is going to be the global coronavirus pandemic. However, there are lots of smaller stories that make up that big-picture view, and one of the most interesting is in the retail sector and the real estate investment trusts (REITs) that operate there.

Here's why long-term investors should analyze the real effects of 2020 and use that knowledge to perhaps fuel a decision to buy this cheap retail-related REIT as 2021 gets underway. 

It was bad and then it got worse

As 2020 got underway, the retail sector was dealing with the slow-moving retail apocalypse. On the surface, the problem was the consumer shift toward online shopping, but it really wasn't that simple. Yes, the internet was an issue, but so was the fact that retailers had fallen behind consumer trends (including product selections and store experiences), and many had over-leveraged their balance sheets. The weakest players were going bankrupt, and even some of the stronger names were closing stores.

A woman drawing a risk vs reward graph.

Image source: Getty Images.

Things got worse when the coronavirus led to the closure of non-essential businesses in early 2020, speeding up what was likely to have been years of industry upheaval. The retail apocalypse was suddenly an apt name for what was going on. The impact quickly hit real estate investment trusts that invested in retail properties, with mall landlords like Simon Property Group (SPG 0.28%) among the hardest hit.

There was good reason for that, too -- some mall tenants stopped paying rent, and others went bankrupt. In fact, the pain is far from over in the mall space, and two of the biggest landlords have fallen into bankruptcy themselves. But not all mall REITs are alike, just like not all retailers are alike. In fact, there are some retailers using this downturn to strengthen their businesses, and there are some mall REITs doing the very same thing. 

Down but not out

Simon Property Group's stock is now 50% below its 2018 highs, and 37% off of its early-2020 peak. There are legitimate reasons for this, like a dividend cut in 2020 and still-weak rent collection rates (roughly 85% in the third quarter of 2020). Moreover, muddling through the current headwinds won't be quick or easy.

The key is that Simon has to re-tenant its malls, which is always a slow process even during stronger market environments. Malls are ecosystems that need to be carefully maintained to ensure that both shoppers and retailers are happy. Put simply, it's unwise to put a dollar store in the same mall as a high-end fashion retailer -- the two just don't mix. So even after vaccines are widely distributed, Simon will likely still be working on its turnaround, and it will likely take a couple of years to get the business fully back on track.

But Simon happens to be one of the best-positioned landlords in the mall sector. For starters, it has a large and diversified portfolio with around 200 or so malls, including both enclosed malls and outlet centers in the United States and abroad. Its malls are generally located near dense and wealthy areas, which is where retailers like to put stores. And it has one of the strongest financial positions in the industry. 

SPG Financial Debt to Equity (Quarterly) Chart

SPG Financial Debt to Equity (Quarterly) data by YCharts

All of this suggests that Simon will muddle through the downturn in relative stride.

However, this isn't all that investors should be looking at. In addition to being in better shape than many peers, the REIT has also been using this downturn to improve its industry positioning. That includes buying a smaller competitor with a strong global property portfolio and investing, with partners, in bankrupt retailers. Put simply, Simon is positioning itself to come out of this downturn a stronger company. 

Buying when others are fearful

Simon is not an easy name to like right now given the headwinds it is facing. However, that's why its stock price is cheap today. And for more aggressive investors willing to ride out some rough times, the current 5.6% dividend is pretty attractive. The 65% payout ratio in the third quarter, meanwhile, leaves some room for additional potential adversity. This is not a great call for conservative types, but if you don't mind going against the crowd, this cheap mall landlord could be a good addition to your portfolio in 2021. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
SPG
$117.10 (0.28%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.