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Bear Of The Day: Simon Property Group (SPG)

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The retail apocalypse hit the fan in 2020 as foot-traffic halted and click-traffic surged. The retail sector has seen a massive divergence this year. Digital-inclined omnichannel retailers and e-commerce shopping platforms far outperformed the plummeting shares of legacy retailers.

Simon Property Group (SPG - Free Report) is starting to feel the adverse implications of the declining retail sector. A sizable portion of its traditional brick-and-mortar clients are reaching a breaking point. Many have been forced into bankruptcy, closing their storefronts and defaulting on their lease obligations with Simon Property.

SPG is the best-in-class real estate investment trust (REIT) for shopping, dining, and entertainment, but unfortunately, its clientele are operating in a declining industry. The post-pandemic New Normal is going to be one that is driven by click-traffic while foot-traffic falls. Analysts have been increasingly pessimistic about this business's future, dropping EPS estimates for years to come and pushing SPG into a Zacks Rank #5 (Strong Sell).

The Recent Uptick

With 2 high potential vaccines on the horizon, investors & traders are beginning to price foot-traffic back into the markets with a light at the end of the COVID tunnel. The beat-up traditional retailer space has been catching a bid in the past couple of weeks as the equity markets move up the timeline to full economic recovery.

Since Pfizer's (PFE - Free Report) first vaccine announcement earlier this month, SPG has jumped 41%, but is this move justified?

Despite the revived optimism about 2021, COVID cases have been surging, and we may be in for a cold economic winter, with states already beginning to lockdown again. Brick-and-mortar retailers are in for more pain before the end of the pandemic. The night is always darkest before the dawn, and this statement has never been truer than it is for traditional storefronts today.

The retail apocalypse has been occurring for the past 5 years as the ease of shopping right from your couch has reduced foot-traffic levels in malls and shopping centers. This has been devastating for mall operators like Simon Property Group, as well as department stores such as Macy's (M - Free Report) , Nordstrom (JWN - Free Report) , Kohl's (KSS - Free Report) , and J.C. Penney, who filed Chapter 11 bankruptcy back in May.

J.C. Penney was not alone in filing for bankruptcy protection this year, with J. Crew, Nieman Marcus, and Brooks Brothers all following suit as foot-traffic and cash-flows dried up.

I believe that the pandemic is cleaning house. Getting rid of antiquated business models that were already on their way out and allowing well-adopted retail businesses that provide what consumers want/need to thrive.

SPG is the best-in-class REIT of a dying sector, but it will need to make some structural changes in order to adapt to the shifting consumer.

Final Thoughts

Some value investors may argue that there is still opportunity in the 'heavily discounted' department stores. Still, I'm not chasing these antiquated names unless they can flip the obsolescence narrative and adapt to the rapidly changing consumer.

My focus remains on growth companies with a future that aligns with the next generation of consumers' values, aka Millennials and Gen Z's. Amazon (AMZN - Free Report) , Alibaba (BABA - Free Report) , Etsy (ETSY - Free Report) , and TJX (TJX - Free Report) are the retail stocks that I would stick with, and the recent pullback created a robust long-term buying opportunity. 

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