Simon Says: Give This Mall Stock a Shot

The perception is that malls are dead and will never recover. We're constantly being told that people are just not shopping in physical stores anymore. That sentiment has been repeated so often that shares of even the best mall operators have been mauled themselves. The reality, for class A operators like Simon Property Group , suggests those negative feelings are way overblown. The table below shows SPG's progress over the past eight years. EPS more than tripled. Funds from operations -- or FFO -- grew by 80%. Dividends expanded by more than 137%. None of that sounds like bad news. From 2011 through mid-2016, SPG shares rallied from near $95 to north of $229. Since then, even as fundamentals improved further, SPG regressed. As of Friday's close, SPG was offered near $144. Until last week, SPG hadn't changed hands as cheaply as that since back in 2013. FFO went up 40% and dividends climbed by 78.4% while the stock dropped back by 37%. That inexplicable disparity has created a tremendous buying opportunity in SPG. The company is very high quality. Value Line assigns SPG an A for financial strength. It is in the top 10% of all 1,700 stocks in Value Line's main research universe in terms of share price stability. SPG rates higher than 85% of those 1,700 companies when it comes to earnings predictability. Its 40th percentile price growth persistence score is actually a positive for investors looking to establish new positions, or to bulk up older ones. The value created, but not now reflected, since 2011 means a catch-up move is a near certainty for anyone owning with a reasonable time horizon. What is Simon Property really worth? From 2011 through 2018, SPG's average Price to Funds From Operations Ratio ran about 17.5-times, accompanied by around a 3.12% yield. At $144 per share, the REIT was offered for just 11.6-times FFO while paying 5.83% in current yield. Even a partial reversion-to-the-mean valuation would support an end of 2020 price target well above $200 per share. That goal appears quite attainable. SPG topped out between $186 and $229 during each of the seven years 2013 right through 2019 year-to-date. Earning per share, FFO and dividends are all expected to set new all-time highs this year, and then more new records in 2020. Add in the almost 6% annual dividend and total return prospects are pretty amazing for such a conservative stock. I'm not alone in my bullish take on SPG. Yahoo Finance lists it as a Buy with a $175.21, 12-month target price. I'd say that's a very modest goal. Even so, if achieved, buyers at last week's close would see over 27% in total return by Dec. 31, 2020. Independent research from Morningstar rates Simon as a four-star, out of five, Buy. Morningstar deigns to provide year-ahead target prices. It does, however, offer its estimate of present-day fair values for each stock it covers. For SPG that number sits at $189, greater than 31% above its current quote. If it takes a full year to get there, total return would exceed 37%. Option savvy traders, in margin accounts, can participate in SPG's future price action without even laying out any cash up front. Put premiums on SPG's Jan. 21, 2022 expiration date put options are especially generous right now. Actual bid-ask spreads for its $150, $160 and $160 strike price puts are shown below, with SPG at $144. Worst-case, forced purchase prices dropped to between $122.20 and $128.20 depending on strike price(s) selected. Owning it there shouldn't be scary. Future stock market action can never be guaranteed. That said, SPG hasn't been available for purchase below $129 since the first half of 2012, about seven and a half years ago. Maximum profit on these, or any other option sales, always equals keeping 100% of the premium received up front. In the examples shown, that would equal the significant sums of from $2,780 to $4,180 per 100-share commitment. Writing those puts can lead to only two possible outcomes. You'll either see them expire giving you nice profits, or end up owning shares of a world-class, high yielding REIT at a multi-year low price. How cool is that? You'd be hard pressed to find a better total return stock than SPG right now. Buy some shares, sell some LEAP puts or consider doing both.

Simon Says: Give This Mall Stock a Shot

Malls are supposed to be left for dead, but Simon Property Group is poised to give solid returns.

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