The bear market this year has been brutal for stocks, and many quality companies have been marked down. This year's bear market has been largely driven by the return of inflation, which has caused the Federal Reserve to take drastic action and increase the federal funds rate.
Rising interest rates are generally bad news for the economy, which is why there is an old market saying: "Don't fight the Fed." That said, it looks like the Fed is closer to the end of the tightening cycle, which should be good news for stocks overall. Here are two quality companies that have been marked down during this bear market and could rebound once it ends.
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A high-quality mall operator in the markdown aisle
Simon Property Group (SPG -0.68%) is a real estate investment trust (REIT) that operates shopping malls and premium outlets. The company also owns an 80% interest in the Taubman Realty Group, another mall operator.
Simon has underperformed this year because of fears that rising interest rates will cause a recession, which would negatively affect consumer spending.
While this is a valid fear, the company's second-quarter results don't indicate that things are slowing down, at least not yet. Occupancy stood at 93.9% compared to 91.8% a year ago. Net income and funds from operations (FFO) were down year over year, but that was largely due to one-time charges. Comparable-mall FFO was up 1.4%. The company also raised guidance and increased the dividend.
So far this year, the labor market has remained robust despite increases in interest rates and falling gross domestic product. Unemployment remains low, and wages are rising. The sky-high gasoline prices of the spring and early summer seem to be returning to normalcy, which is another positive for the consumer.
Simon has guided for comparable FFO to come in between $11.70 and $11.77 per share. Using the midpoint of guidance, the company is trading for less than 9 times FFO per share, which is cheap for a premier REIT like Simon. The current dividend of $6.80 is amply covered by funds from operations and gives the stock a yield of 6.5%. If the economy and consumer spending hold up, we could see increases in earnings.
Benefiting from a decrease in economic uncertainty
S&P Global (SPGI 0.01%) is another company that has underperformed this year. S&P Global is best-known for its credit ratings business, and its stock and bond indexes (for example, the S&P 500 and all the sub-indexes). It recently bought IHS Markit, which has a big suite of data products and owns the Carfax service.
The company missed earnings expectations in the second quarter, which was largely due to declining bond issuance. During the pandemic, bond issuance was strong as companies borrowed to take advantage of super-low interest rates.
During recessions or periods of rising interest rates, companies often will pause capital raises since expansion plans are often put on hold and the markets are often inhospitable to new issues. Uncertainty about interest rates will clear up in the next few months as we approach the end of the Fed's tightening cycle.
The fed funds futures seem to predict that the fed funds rate will peak within a range of 3.75% to 4% and then stay there. Also, a return to a bull market will mean more stock trading volume, which is a positive since the company earns royalties on the use of its indexes and their derivatives.
S&P Global is also going to benefit as it finishes its integration with IHS Markit. There are a lot of costs that will be cut, which will help drive earnings. The stock is trading at 32 times 2022 earnings, which is somewhat expensive, but this is off of what should be trough earnings. The Street sees over 20% growth in earnings per share between 2022 and 2023.
