Please ensure Javascript is enabled for purposes of website accessibility

3 Stocks to Watch If the Market Crashes

By Reuben Gregg Brewer – Oct 10, 2021 at 6:21AM

Key Points

  • Finally tested, fast-growing STORE Capital has now proven it can handle adversity while continuing to reward investors.
  • With over 50 years worth of dividend hikes, it pays to add Federal Realty when the market is throwing the baby out with the bathwater.
  • Still working on its comeback, Simon Property Group used the 2020 downturn to strengthen its business, which has already proven very rewarding.

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

These retail REITs will tumble along with the market, but they have proven resilient, and that means a downturn is a buying opportunity.

The world is in a tenuous place today, with stock markets running hot despite the coronavirus pandemic still wreaking global havoc.One of the hardest-hit areas of the economy when the illness first emerged was retail, putting pressure on retail landlords along the way. Many real estate investment trusts that own retail properties have come back strongly in 2021 as the world learns to deal with the coronavirus, but they will likely sell off anew if the broader market tanks. Still, the pandemic was an important testing ground for the retail REIT names that have what it takes to succeed no matter what gets thrown at them. Here are three retail REITs that you should consider picking up if, more likely when, the market crashes.

1. The new kid gets an A

STORE Capital (STOR 0.09%) IPOed in late 2014, long after the 2007 to 2009 financial crisis. Until 2020 it had basically only operated during good times, so it was impossible to use history as a guide to what might happen during the pandemic. At first it looked pretty bad, with rent collections falling to less than 70% at one point early on. However, that quickly reversed, and by the end of the year was up to 90% and largely in line with bellwether names in the net lease sector. (Net lease REITs own single-tenant properties, but their lessees are responsible for most of the costs of the assets they occupy.)

A balance with the words risk and reward on it spelled out with blocks.

Image source: Getty Images.

Moreover, it didn't stop buying new properties, spending $800 million despite the uncertainty last year. That said, it sold more properties than expected, nearly matching the amount in new purchases it made. Pruning lesser properties to add better ones is a great plan, especially when capital market access is tight. In other words, this real estate investment trust did all the right things when the chips were down and proved it can handle adversity as it quickly grows into one of the most prominent names in the net lease niche.

Note, too, that STORE Capital increased its dividend in 2020, showing that the company places a high value on this vital source of investor return. If the market sells off and STORE Capital's shares go along for the ride, you might want to add some to your portfolio.

2. Been there, done that

The next name on this list is Federal Realty (FRT), which owns strip malls and mixed-use developments. These aren't sexy properties, but they are the type of places that drive everyday life. Some 75% of the REIT's locations have a grocery store in them.

What sets this landlord apart from its peers is that it only owns around 100 properties, which is a pretty small number given that its $9.4 billion market cap makes it one of the largest names in the strip mall sector. The reason for this is that Federal Realty focuses on owning top-tier properties in top-tier markets. Basically, it's in wealthy neighborhoods with material populations, which is exactly where most retailers want to put their stores. The early days of the pandemic were tough, for sure, but things quickly turned around as retailers tried to upgrade into Federal Realty properties from nearby locations.

Last year, in hindsight, was a great time to buy Federal Realty. But the interesting thing here is that the REIT's resilience shouldn't have been shocking to anyone who knows the company. Indeed, with more than 50 consecutive years of dividend increases under its belt, Federal Realty has proven it can roll with the punches. You don't get to Dividend King status by accident.

That said, the next market downturn is likely to take Federal Realty's shares along with it, as Wall Street throws the baby out with the bathwater...again. And that is when long-term dividend investors should pounce on this proven, high-quality name.

STOR Chart

STOR data by YCharts

3. A leap of faith

The final REIT on this list is mall landlord Simon Property Group (SPG -0.17%). There's no way to sugarcoat it -- 2020 was a disaster for malls, causing Simon to cut its dividend by roughly 40%. The mall space, meanwhile, has seen a number of bankruptcies, with many lower-quality malls getting permanently shuttered. It would be understandable if risk-averse investors chose to stay away from the space. More aggressive types, however, would do well to look at Simon, particularly if the market falls anew.

Yes, the REIT cut its dividend in 2020, but it has already increased the payment twice so far in 2021. Essentially, the worst of the pandemic hit appears to be behind it. In fact, Simon used the downturn to strengthen its industry position, buying a peer and investing, along with partners, in iconic, but troubled, retailers. This is roughly similar to what happened during the 2007 to 2009 recession, after which Simon went on to increase its dividend by more than 100% over the next five years or so. Even after the most recent cut, the dividend was still well above its highs before the 2007 to 2009 recession.

And, this time around, the company, which owns some of the best assets in the mall space, is set to benefit from a reverse networking effect. Essentially, as lesser malls shut, the remaining malls get more attractive to retailers and shoppers. While not for the faint of heart, more adventurous types should take a close look at Simon Property Group if a broader market crash pushes the shares lower. There's still more work to be done before the mall landlord is "back," but it has already proven that it is the best-positioned name in the sector.

Going against the grain

It's hard to buy when others are despondently selling. That's why the time to create a list of buy candidates is before the next sell-off. STORE Capital, Federal Realty, and Simon Property Group are three proven names that have what it takes to excel over the long term. The next bear market could be the perfect time for you to add these industry leaders to your portfolio.

Reuben Gregg Brewer owns shares of Federal Realty Inv. Trust and Simon Property Group. The Motley Fool recommends STORE Capital. The Motley Fool has a disclosure policy.

Stocks Mentioned

Store Capital Stock Quote
Store Capital
STOR
$31.87 (0.09%) $0.03
Simon Property Group Stock Quote
Simon Property Group
SPG
$117.49 (-0.17%) $0.20
Federal Realty Inv. Trust Stock Quote
Federal Realty Inv. Trust
FRT

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

Related Articles

Premium Investing Services

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