Bear Market Coming? Learn From The Last One

Includes: BDX
by: John Kozey

Summary: A rising U.S. stock market that doesn't seem to want to pull back has made investors and forecasters nervous. Global economic indicators are softening -- especially in bellwether Germany -- and some pundits are saying there's a bear market looming. So what's a good way to batten down the hatches? A Thomson Reuters StarMine analysis looked at factors that affected underperforming stocks in the 2008-09 meltdown. It found ten stocks that 1) beat the market then and are doing well now and 2) possess those 2008-2009 market-beating factors today.

If you were invested in U.S. equities since the beginning of the year, then you had a great year this past quarter (yes, you read that right)The S&P 500's 11% total return through the end of March and 19% gain since November seems to be intimidating some folks. Why? Without even a minor correction, some market prognosticators have been issuing stock market forecasts calling for a pullback fairly soon. The range of predictions runs from the minor 5% variety to a full-fledged bear market drop of 20% or more.

The Bear Case

The macro data seems to lend some support to the pullback scenario. As the U.S. has become more entrenched in the global economy, any problems abroad can and do ripple back to at least some U.S. companies.

Naysayers mostly point to weakness in China, gold and Europe. The world's second largest economy continues to show weak sentiment along with slowing demand for base metals. Gold experienced its largest price drop in April that aroused greater nervousness, though some are waiting for another shoe to drop that may send it reeling once again. Global growth forecasts are down again - and that includes the shaky eurozone, according to the April 16th IMF World Economic Outlook. The IMF's 2013 forecast for world output dropped to 3.3% from 3.5%. Arguably the eurozone's leader, Germany has seen a drop in business sentiment on top of a 13% drop in auto sales.

Learning from the Past

While a 2013 market crash doesn't yet appear in the cards, we thought we may learn something from the bear market of 2008-09. However, we took a non-traditional angle. While most historic analyses focused on the economic sectors that fell less than the S&P 500, StarMine Quantitative Research examined the factors that resulted in that same outperformance. Using the same winning factors of the 2008-09 period, we'll then identify stocks today that possess the qualities that outperformed back then.

Identifying Winning and Losing Factors

StarMine examined 25 fundamental factors that helped explain future stock performance. The result was the Smart Holdings model, which measures institutional demand for stocks based on which of those factors are most and least favored. Using the Thomson Reuters OP ownership database of all institutional holdings, we reverse engineered funds' buying and selling behavior.

In the table below, the factors are ranked in order of favor (1 through 25) by month beginning with September 2008 (the column labeled '2008-09' on the left). As an example, trailing 12-month cash flow to price ('T12M CF/P') was constantly highly ranked. This means stocks that were cheap by this measure were more likely to be bought than sold. Intuitively this makes sense - not only were they cheap, but by kicking off a lot of cash, they were less vulnerable to the credit crunch underway at that time. These were companies more likely to be self-funding. Companies with higher return on equity ("ROE" in yellow) were also favored.

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Using Thomson Reuters StarMine screening, we used some of the more robust winning factors over the time frame from September 2008 through April 2009. Our screen included the following:

  • Market cap at least $2 billion and average trading volume over 400,000 shares
  • Mid-term price momentum in the top 33% of all U.S. stocks
  • Growth and ROE above the long-term steady state median of 6%
  • Top half ranks for accruals (lower accruals)
  • Top half ranks for Price/Cash Flow
  • Eliminate any bottom 20% ranks for debt interest coverage

Screen Results

Our April 2013 filter produced 23 companies. Ten of them happened to outperform (that is, declined less than) the S&P 500 back in the September 1, 2008 to March 5, 2009 period, which was the last full week before the March 9 market bottom. They are listed in the table below.

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Global medical technology company Becton Dickinson (NYSE:BDX) is an example of a company with the characteristics described above. The price to cash flow value of 10.8 is below the 10-year median of 11.7, and the P/CF level for the coming 12 months stands at only 10.1. Likewise, the company's trailing ROE of 35% exceeded the prior year's 25%. This is the type of financial strength that helps drive more confidence.


These are companies that passed our screen parameters and also which outperformed the S&P in the period leading up to the market bottom of 2009. Relaxing the filters would produce more results, and as mentioned above, 23 companies did pass the list though the others did not outperform the last bear market. One final observation is that through April 24, 2013, seven of 10 names have beaten the market handily, with the other three not far behind. Smart investors faced with a nervous tape might want to watch for some of the factors we've identified.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.