Howard Hughes Corporation (NYSE: HHC), a developer of master-planned communities, or MPCs, has been beaten down in 2020. Even after a recent rebound, shares trade for nearly 60% less than where they started the year.
This begs the question -- is Howard Hughes a bargain stock long-term investors should take a closer look at, or is it a value trap to be avoided at all costs? Here's a quick rundown of some of the reasons Howard Hughes' stock has plunged so dramatically and whether investors should jump in or stay away.
It's been a rough 2020 for Howard Hughes Corporation
Howard Hughes has been one of the worst-performing stocks in the beaten-down real estate sector in 2020. As of July 31, its stock is still down by 58% for the year.
There are a few reasons for the dismal performance. First of all, Howard Hughes owns a portfolio of commercial properties located in its master-planned communities, and many of them were (and continue to be) affected by the economic shutdowns and COVID-19 restrictions. For example, the company owns a considerable number of hotel and retail properties.
Second, keep in mind where Howard Hughes' MPCs are located. Its flagship communities are located in the Houston area -- not only is Texas a coronavirus hotspot but its economy also depends on the beaten-down oil industry. This could adversely affect land sales and could also disrupt Howard Hughes' commercial assets, as Occidental Petroleum (NYSE: OXY) is a major office tenant of the company. Another of Howard Hughes' massive MPCs is located near Las Vegas, where the economy depends on gaming, entertainment, and group events.
In addition, Howard Hughes wasn't as financially flexible as many other real estate companies as the pandemic hit. When the economy worsened, instead of drawing from a credit line or raising money on the debt markets, Howard Hughes was forced to sell 12 million shares after the stock had plummeted, diluting existing shareholders -- a move I was not thrilled to see.
This isn't an exhaustive list of the issues the corporation has faced, but the bottom line is that 2020 has essentially been a perfect storm of negative catalysts for Howard Hughes' business (and its stock price).
Still a solid long-term business model
Having said all of that, the long-term economics of the MPC business model are still solid. Howard Hughes' business is essentially a real-life version of the game Sim City. The company controls the supply of land and commercial assets in its communities, which creates excellent pricing power and long-tailed profit potential. And most of its MPCs are still decades away from being fully built out.
If Howard Hughes can make it through the tough times relatively unscathed, there's some serious value creation potential in its communities. But that's a pretty big "if" at this point.
Is Howard Hughes a buy?
In full disclosure, I'll say that Howard Hughes Corporation is one of the larger stock positions in my own portfolio and I have no plans to sell any of my shares. In fact, I've added a bit since the pandemic started.
That said, there are still more questions than answers when it comes to how the next few years will play out for Howard Hughes' business, which is why we're still seeing it trade for such a depressed valuation. I'm holding on and believe that long-term investors will be handsomely rewarded, but this is by no means a low-risk stock, and the next couple of years are likely to be quite a roller coaster ride.