It’s been quite a roller coaster ride for stock investors, with the market plunging into bear market territory with record-setting speed in March before having the best month in decades in April. The Dow Jones Industrial Average and S&P 500 are now just over 15% down from their all-time highs set earlier this year.
Despite the rapid rebound, there are some stocks still trading for incredibly cheap valuations, and several of them are favorites of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett. Here’s why bargain-seeking investors should take a closer look at Wells Fargo (NYSE:WFC) and STORE Capital (NYSE:STOR) in May.
This bank has its issues, but what a compelling discount
Wells Fargo’s stock was performing poorly before the COVID-19 pandemic. The bank’s infamous fake-accounts scandal and several other “mini scandals,” combined with the unprecedented Federal Reserve penalty that prohibited the bank from growing caused the bank to underperform its peers dramatically in recent years.
Then the pandemic hit. The rest of the “big four” U.S. banks — Citigroup, Bank of America, and JPMorgan Chase — all have investment banking businesses that actually perform better during volatile times. On the other hand, Wells Fargo looks more like a traditional savings and loan, relying almost exclusively on commercial banking. Since the fake accounts scandal was first publicly reported in September 2016, Wells Fargo has underperformed the overall financial sector by a staggering 40 percentage points.
One important point to keep in mind is that while Wells Fargo’s business practices certainly got it into trouble in recent years, its assets are not a weak point. Wells Fargo has a long history of smart risk management and maintaining excellent asset quality. This is the business practice that allowed it to acquire Wachovia for a fire-sale price during the financial crisis and emerge as one of the biggest U.S. banks. And this prudent risk management hasn’t changed.
That’s why, despite the bank’s scandals in recent years and its near-exclusive reliance on commercial banking, Wells Fargo looks like an absolute steal at just 63% of its book value and with a dividend yield over 8%.
The right kind of retail
The only real estate investment trust, or REIT, in Berkshire Hathaway’s investment portfolio, STORE Capital focuses on single-tenant commercial properties (Note: STORE stands for Single Tenant Operational Real Estate). Most — about 80% — of the company’s tenants are in the retail or service industries.
STORE Capital’s stock price is less than half of its pre-COVID peak, and it’s easy to understand why. While much of the portfolio is occupied by “essential” businesses like auto repair, medical and dental, construction materials, and equipment sales and leasing businesses, there’s quite a bit of exposure to troubled industries. Specifically, restaurants are STORE’s largest tenant category, making up 14% of the rental income, and there are also lots of health clubs, movie theaters, and family entertainment centers occupying the company’s properties as well. The roughly 13% of the portfolio that is made up of education businesses and furniture stores isn’t doing that well either.
While some tenants could certainly run into trouble, STORE’s business should be just fine. Its tenants are on long-term triple-net leases with annual rent increases built in, and the company has done an excellent job of working with its tenants to defer rent and come up with mutually beneficial solutions. The company collected 68% of its April rent, and with many states starting to reopen, it’s likely that most of the uncollected rent won’t be permanently lost.
In short, STORE Capital has some near-term uncertainty, but its diversified tenant base, strong liquidity, and smart growth strategy should help the company emerge from the pandemic relatively unscathed. Plus, the historic low-interest environment can be a strong growth catalyst for real estate companies. With a 7% dividend yield, now could be a great time to consider this Buffett REIT for your portfolio.
Buy for the long term
To be clear, I don’t expect either of these stocks to turn things around immediately, and although I think they’ll be excellent long-term investments, they could be quite a roller coaster ride for as long as the coronavirus pandemic lasts.
If you have an investment time horizon that’s measured in decades, both of these stocks look like incredibly attractive values. Just be prepared to deal with some ups and downs along the way, especially in the near term.