Many investors are convinced the markets are ready to dip even lower as the coronavirus spreads into places like Canada, the United States, and various European countries — nations that really haven’t seen a major outbreak yet.
There’s also no doubt this pathogen has caused a major impact to the world economy. Growth will be stunted for at least a little while. The only question is, how long will it last? Alarmists say we still haven’t seen the worst of the virus’s impact, while more moderate outlooks say we’ll be back to normal in no time.
No matter what your prediction is, the truth is, we’re in uncertain times, and if there’s one thing investors hate, it’s uncertainty. This is ultimately what’s causing major declines in stock markets around the world.
Uncertainty also represents a major buying opportunity for those who are brave enough to wade into these tumultuous waters. In fact, I’m willing to go as far as saying this market swoon is the best opportunity to add stocks to your portfolio since the depths of 2009. Here’s why.
An upcoming catalyst
Unlike most economic downturns, the recent volatility is caused by one thing. Once the coronavirus runs its course — no matter how long this takes — we should return to solid economic growth. This means the only thing traders will be waiting for is an indication the worst of the virus is behind us.
That signal could come as soon as a week or two, or it might take months. That’s the crux of this issue, no one really knows.
As investors, the only thing we can do is position our portfolios accordingly. We must take positions in great companies that are selling cheaply today before the market rallies and investors miss out on those gains.
Will you be brave?
Like in 2009, I believe gains from blue-chip stocks will be a little more modest. These stocks tend to hold up a little better during times of turmoil — a trade-off that ensures they don’t have as much upside when things get better again.
This means you’ll be forced to take on a little more risk to get truly excellent returns.
Take, for instance, American Hotel Income Properties REIT (TSX:HOT.UN), which owns 79 upmarket hotels in what it calls “secondary markets” in the United States, featuring cities like Pittsburgh, Corpus Christi, and Minneapolis. These properties are acquired at cap rates of above 8% and always below replacement costs.
With business travel grinding to a virtual halt, investors are concerned about the company’s short-term outlook. The stock price has fallen accordingly, decreasing from more than $7 per share a month ago to $6.09 today. Additionally, the company’s generous 14% dividend is also in grave danger of being cut.
But these are just short-term issues. Investors who look beyond the next few months will see a much different story. Over the last year, during pretty good economic times, the company earned US$0.71 per share in funds from operations. That converts back to $0.95 per share in Canadian currency. This means the stock trades at just a hair over six times what I’d consider to be normalized earnings. It’s ridiculously cheap.
All the company has to do is survive a few lean months, and it has potential to deliver excellent returns. The stock could easily double from here once pent-up travel demand roars back. And even if the dividend is cut in half, you’ve still locked in a 7% yield on your money.
The bottom line
Thanks to the recent sell-off, the market is filled with tantalizing opportunities like American Hotel Income Properties REIT. If you believe this latest economic uncertainty is only temporary, then it’s time to start buying stocks.
Opportunities like this only come by once a decade or so. Will you let this one pass you by?
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith owns American Hotel Income Properties REIT shares.