Bear markets are an inevitable if particularly unpleasant part of the market cycle.
But investors who hold the best stocks to buy for bear markets can mitigate at least some of the damage.
The S&P 500 on Friday dropped into bear market territory – down 20 per cent from its recent peak.
The Nasdaq Composite, for its part, fell into a bear market a while ago.
And so if this is how things are going to continue, investors might want to arm themselves with the best stocks they can find.
And right now, those stock picks should focus on resiliency during deep downturns.
by Dan Burrows, Kiplinger
- The best bear market stocks tend to be found in defensive sectors, such as consumer staples, utilities, healthcare and even some real estate equities.
- Furthermore, companies with long histories of dividend growth can offer ballast when seemingly everything is selling off.
- And, of course, low-volatility stocks with relatively low correlations to the broader market often hold up better in down markets.
- To find the best stocks to buy for bear markets, we screened the S&P 500 for stocks with the highest conviction consensus Buy recommendations from Wall Street industry analysts.
- We further limited ourselves to low-volatility stocks that reside in defensive sectors and offer reliable and rising dividends.
- Lastly, we eliminated any name that was underperforming the broader market during the current downturn.
- Market value: $694.1 billion
- Dividend yield: N/A
- Analysts’ consensus recommendation: 2.25 (Buy)
Warren Buffett’s Berkshire Hathaway (BRK.B, $314.81) gets a consensus recommendation of Buy with only modest conviction, but then a mere four analysts cover the stock.
One pro rates it at Strong Buy, one says Buy and two have it at Hold, per S&P Global Market Intelligence, which means the latter two analysts believe Buffett’s conglomerate will only match the performance of the broader market over the next 12 months or so.
That’s a reasonable assumption if stocks do indeed avoid falling into bear-market territory.
BRK.B, with its relatively low correlation to the S&P 500, tends to lag in up markets.
By the same token, however, few names generate outperformance as reliably as Berkshire does when stocks are broadly struggling.
That’s by design.
And Buffett’s wisdom of forgoing some upside in bull markets to outperform in bears has proven to be an incomparably successful strategy when measured over decades.
Berkshire’s compound annual growth (CAGR) since 1965 stands at 20.1%, according to Argus Research.
That’s more than twice the S&P 500’s CAGR of 10.5%.
As one would expect, BRK.B is beating the broader market by a wide margin in 2022, too.
The stock gained 5.2% for the year-to-date through May 17, vs. a decline of 14.2% for the S&P 500.
If we do find ourselves mired in a prolonged market slump, BRK.B will probably not go along for the ride.
- Market value: $285.2 billion
- Dividend yield: 2.6%
- Analysts’ consensus recommendation: 1.88 (Buy)
Few names in the defensive consumer staples sector can match Coca-Cola (KO, $65.79) when it comes to blue-chip pedigree, history of dividend growth and bullishness on the part of Wall Street analysts.
Coca-Cola’s blue-chip bona fides are confirmed by its membership in the Dow Jones Industrial Average.
But the company also happens to be an S&P 500 Dividend Aristocrat, boasting a dividend growth streak of 60 years and counting.
Oh, and Coca-Cola also enjoys the imprimatur of no less an investing luminary than Warren Buffett, who has been a shareholder since 1988.
At 6.8% of the Berkshire Hathaway equity portfolio, KO is Buffett’s fourth-largest holding.
Coca-Cola’s more immediate prospects are bright too, analysts say.
It’s an unusually low-beta stock, for one thing, and that has been very helpful during this dismal 2022.
Shares in KO have gained more than 11% for the year-to-date through May 17, beating the broader market by more than 25 percentage points.
True, KO was hit hard by pandemic lockdowns, which shuttered restaurants, bars, cinemas and other live venues.
But those sales are now bounding back.
Analysts likewise praise Coca-Cola’s ability to offset input cost inflation with pricing power.
“We think KO’s strong fourth-quarter results reflect its brand power and ability to thrive in an inflationary environment, as top line improvement was entirely driven by price and mix,” writes CFRA Research analyst Garrett Nelson (Buy).
Most of the Street concurs with that assessment.
Twelve analysts rate KO at Strong Buy, six say Buy, seven have it at Hold and one calls it a Sell.
- Market value: $64.3 billion
- Dividend yield: 2.1%
- Analysts’ consensus recommendation: 1.81 (Buy)
Shares in defense contractor General Dynamics (GD, $232.02) benefit in down markets both from their relatively low volatility and dependable dividends.
That alone makes GD worth considering as one of the better bear market stocks to buy.
What puts General Dynamics over the top, however, is its robust long-term growth forecast and potential for high share-price appreciation, analysts say.
GD’s defensive characteristics have certainly been well documented so far in 2022.
Shares gained 11% for the year-to-date through May 17, a period in which the S&P 500 fell more than 14%.
And the Street sees more outperformance ahead.
Of the 16 analysts issuing opinions on the stock tracked by S&P Global Market Intelligence, nine call it a Strong Buy, two say Buy, four have it at Hold and one calls it a Sell.
Analysts forecast General Dynamics to generate average annual EPS growth of 11.6% over the next three to five years.
And, notably, their average target price of $266.07 gives GD implied upside of about 15% in the next 12 months or so.
“Over the long term, GD management is focused on driving growth through modest sales increases, margin improvement, and share buybacks,” writes Argus Research analyst John Eade (Buy).
“The company also aggressively returns cash to shareholders through increased dividends (most recently with a hike of 6%).”
If we do find ourselves slogging through a bear market – or just a sideways market – 15% price upside would be outstanding.
And as a Dividend Aristocrat with 31 consecutive years of payout increases to its name, shareholders can at the very least count on GD for equity income.
- Market value: $91.0 billion
- Dividend yield: 2.1%
- Analysts’ consensus recommendation: 1.67 (Buy)
Consumer staples giant Mondelez International (MDLZ, $65.45) is one of the best stocks for a bear market for many of the same reasons that it’s one of the best stocks to stave off sizzling inflation.
The company’s vast portfolio of snacks and foods include Oreo cookies, Milka chocolates and Philadelphia cream cheese, to name a few.
Sales of such consumer favourites tend to hold up well amid rising prices thanks to fickle palates and brand loyalty.
Where MDLZ stands out among analysts, however, is in its ability to handle higher input costs thanks to a longstanding hedging program.
The company also has been successful in passing higher costs on to consumers.
“We hold a strong growth outlook for Mondelez as its sales growth continues to outperform our expectations driven by strong market share performances and strong category growth rates,” writes Stifel analyst Christopher Growe (Buy).
Nine consecutive years of dividend increases and a stock that trades with much lower volatility than the S&P 500 should also serve investors well in a tough market.
Indeed, MDLZ was essentially flat for the year-to-date through May 17, vs. a decline of more than 14% for the broader market.
Stifel is in the majority on the Street, which gives MDLZ a consensus recommendation of Buy, with high conviction.
Twelve analysts rate it at Strong Buy, eight say Buy and four have it a Hold.
Pricing power, market share gains and low volatility all help make the case for MDLZ as one of the best bear market stocks to buy.
- Market value: $462.1 billion
- Dividend yield: 1.2%
- Analysts’ consensus recommendation: 1.63 (Buy)
Blue-chip stocks in defensive sectors such as healthcare tend to hold up better in bear markets, which is why it’s no surprise to see UnitedHealth Group (UNH, $492.93) make the cut.
This Dow Jones stock is the market’s largest health insurer by both market value and revenue – and by wide margins at that.
But UNH’s sheer size alone is hardly a reason to hold it through a market downturn.
Shareholders can also take comfort in 13 consecutive years of dividend increases, a stock that’s historically been much less volatile than the broader market, and an outsized profit-growth forecast.
Analysts praise UNH on a number of fronts, with contributions from the Optum pharmacy benefits manager business being a regular highlight.
A steep decline in hospitalizations due to COVID-19 is also a welcome relief.
“We maintain our Strong Buy rating on UNH as we believe shares continue to offer an attractive risk-reward tradeoff, and expect management to execute on its mid-teens EPS growth target,” writes Raymond James analyst John Ransom.
The Street, which gives the stock a consensus recommendation of Buy with high conviction, expects the company to generate annual EPS growth of nearly 14% over the next three to five years.
Lastly, this low-vol stock is performing as expected in 2022.
It is off less than 2% for the year-to-date through May 17. That’s better than the S&P 500 by 12 percentage points.
All images: Getty Images
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