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The current bull market is entering its tenth year.
In spite of there are many preliminary signs to an ending of a bull market, Forecasting market tops and bottoms are tricky, but it’s inevitable that equity markets will falter at some point.
Valuations are fairly high, and while corporates delivered solid earnings in 2017, investors would get very nervous if earnings failed to live up to expectations. Furthermore, volatility spiked recently after a long period at record lows.
What Are The Best Stocks For Bear Market?
The challenge with picking stocks for a bear market environment is that the cause of the downturn will play a part in determining the stocks that will remain unscathed and, and those that won’t. If we do see a downturn in the next year (And we’ve already analyzed the chances for another bear market), it’s likely that the cause will either be a lack of liquidity or a recession. And, the big question will be around interest rates. It’s generally expected that they will rise, although analysts have been wrong on rates for a long time.
Investors often turn to dividend stocks during bear markets. That strategy may work in the next bear market, but investors should be mindful that if rates rise, dividend stocks will look less attractive.
It’s a good idea to diversify across different types of stocks that tend to fare well in bear markets. The following four stocks should all be resilient during a bear market, but for different reasons.
1. Barrick Gold Corporation (NYSE: ABX)
Market Cap: $13.4 Billion | PE: 12.3 | Forward PE: 15.7 | Div Yield: 1.04%
Gold offers a hedge against almost every other asset class. During the next market downturn, there will be very few safe havens for investors to turn to. Any sort of financial crisis is bound to be accompanied by speculation about a devaluation of the US dollar, while the bond market offers little potential upside with plenty of potential downsides. Gold is one of the only assets that actually goes up in price when markets get nervous.
Barrick is the largest gold producer in the world, though it may lose that spot to Newmont in 2018. It’s also the lowest cost producer amongst the largest five producers, which means it has the highest margins. In 2017, Barrick’s cost of producing an ounce of gold was $750, compared to $924 for Newmont and $825 for GoldCorp. Barrick is also one of the most geographically diversified gold producers with operations in 10 countries.
Great Indicators, Promising Future
The company’s large size, high margins, and regional diversification make it one of the safest bets in the gold sector. The gold price has traded in a narrow range since 2013, and gold shares have performed poorly since 2011. That means the gold price and gold shares are trading at a discount to equity markets. This means the downside for Barrick is to an extent limited. And, if equity market volatility picks up, there should be a significant upside for Barrick. If you believe in gold but prefer different exposure than stocks – see the best ways to invest in gold)
2. McDonald’s Corporation (NYSE: MCD)
Market Cap: $124 Billion | PE: 18.8 | Forward PE: 18.03 | Yield: 2.72%
McDonald’s Corporation has proven to be almost recession-proof in the past. In the 2009 recession, its revenue fell by just 3 percent, and by 2010 revenue was back to an all-time high. The stock price fell 22 percent during that period, but quickly recovered after the market bottomed.
There are two reasons that McDonald’s manages to maintain strong revenue during a recession. Firstly, the company’s menu is already one of the lowest priced around. If anything, consumers are going to move from more expensive alternatives to McDonald’s. Secondly, during periods of economic stress, healthy eating becomes less of a priority for many people.
In addition, McDonald’s has a fifty-year history of finding ways to cut costs and improve efficiency. It’s now experimenting with automated self-service technology, which will give it an even bigger advantage over its competitors.
The share price rallied 83 percent between 2015 and late 2017 before correcting from an overbought and overvalued level. It is now fairly valued for modest growth and offers a healthy 2.7 percent dividend yield.
3. W.W. Grainger (NYSE: GWW)
Market Cap: $14.4 Billion | PE: 25 | Forward PE: 17 | Div Yield: 2%
W.W. Grainger is a company that flies below the radar and many investors don’t even know about it. Grainger is a niche industrial supply company that sells equipment, machinery, and tools to manufacturing companies. It is very well managed and dominates the space it operates in. The company has increased its dividend every year for the past 46 years, something few companies have done. In its most recent earnings report, it reported gross margins of 39 percent, a return on equity of 33 percent and a return on invested capital of 18 percent.
Grainger is a resilient company because its business model is built around signing long term contracts to supply its products. This means it is not as exposed to economic cycles as one might expect. The company also has a strong balance sheet and strong cash flows.
In a market downturn, investors will struggle to find a safe place to preserve their capital. As mentioned, the US dollar and the bond market are risky. Furthermore, numerous funds are obligated to keep the capital invested in equities at all times. This will create a demand for solid investments like Grainger.
4. Amazon (NYSE: AMZN)
Market Cap: $722 Billion | PE: 327 | Forward PE: 97 | Div Yield: 0%
Amazon may seem like an odd choice for a bear market stock. After all, it’s trading on a PE of 327 which is about ten times the market average. Generally, during a correction or a bear market it’s the most expensive stocks that are hit hardest. However, there are a few things to consider.
Firstly, Amazon is an exceptional company and shouldn’t be treated like most companies. It has always traded at high valuations because it has never generated much in the way of profits. But the reason for that is that the company always reinvests its cash flow in generating growth and growing its market share. In the fourth quarter of 2017, Amazon’s cloud business grew revenue at 45%. So while the company is not very profitable, it’s reinvesting any free cash it has in businesses that are growing far faster than the rest of the market.
Secondly, shareholders are well aware of Amazon’s strategy to grow market share as fast as possible, even if that comes at the expense of profits. The loyal shareholder base has stuck with the company for the last 20 years because of that strategy.
And finally, a recession is actually an opportunity for Amazon to grow market share even faster. Amazon has taken market share across countless industries over the years. However, the the next recession will be an opportunity for it to put even more pressure on the companies that have managed to defend their customer base against it. Any price weakness will be seen as an opportunity for investors to buy into Amazon’s next phase of growth.