Stocks have suffered greatly in this year’s bear market, and many reputable corporations have seen their prices fall. The return of inflation has been a major contributor to this year’s bear market, which has prompted the Federal Reserve to move decisively and raise the federal funds rate.
There is an old market saying that goes, “Don’t fight the Fed,” which means that rising interest rates are typically bad for the economy. Having said that, it seems like the Fed is getting closer to the conclusion of its tightening cycle, which is excellent news for markets as a whole. Here are two high-quality businesses that have seen their prices fall during the current bear market and may soon see a recovery.
An expert mall operator working the discount aisle
A real estate investment company (REIT) called Simon Property Group (SPG -1.74%) manages upscale stores and malls. Additionally, the corporation controls 80% of the Taubman Realty Group, another mall operator.
Due to worries that a recession brought on by increasing interest rates would have a detrimental impact on consumer purchasing, Simon has underperformed this year.
Although this is a legitimate concern, the company’s second-quarter results show that business is not, at least not yet, slowing down. In comparison to 91.8% a year earlier, occupancy was 93.9%. Although net income and funds from operations (FFO) decreased year over year, one-time costs were primarily to blame.
The job market has remained strong so far this year despite rising interest rates and declining GDP. Both salaries and unemployment are growing. Another advantage for consumers is the seeming return to normality of the sky-high fuel prices of the spring and early summer.
According to Simon’s forecast, comparable FFO will be between $11.70 and $11.77 per share. For a top-tier REIT like Simon, the business is selling for less than 9 times FFO per share at the midpoint of forecast. The $6.80 per share dividend that is now being paid out is fully covered by operating income, giving the company a 6.5% yield. Earnings might rise if the economy and consumer spending continue to do well.
Benefiting from a decrease in economic uncertainty
Another business that has underperformed this year is S&P Global (SPGI -0.95%), which has benefited from a decline in economic unpredictability. The credit ratings business, as well as its stock and bond indexes, are what S&P Global is best known for (for example, the S&P 500 and all the sub-indexes). It recently acquired IHS Markit, which owns the Carfax service and offers a wide range of data products.
Due to decreased bond issuance, the company’s second-quarter profits fell short of projections. Bond issuance increased during the pandemic as businesses borrowed to benefit from historically low interest rates.
Companies often put capital raising on hold during recessions or times of increasing interest rates since growth plans are frequently postponed and the markets are frequently hostile to fresh issuance. As the Fed’s tightening cycle comes to a close, uncertainty regarding interest rates will dissipate over the next several months.
According to the fed funds futures, the fed funds rate will reach its high in the range of 3.75% and 4%, then remain there. Additionally, because the corporation receives royalties from the usage of its indexes and their derivatives, a return to a bull market will result in higher stock trading volume, which is advantageous.
As it completes its merger with IHS Markit, S&P Global will also gain. Many expenses will be reduced, which will increase revenue. The stock is rather expensively priced at 32 times 2022 earnings, although this is based on what should be trough earnings. Over 20% rise in profits per share is predicted by the market between 2022 and 2023.
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