- Fear and uncertainty are moving the markets lower and investors have been rotating into defensive stocks. Investors want to limit their downside.
- Bear markets can be a good opportunity to purchase stocks at a lower price, as well as diversify your portfolio.
- In preparation for a Bear Market, investors tend to reduce positions in growth stocks and increase allocations to stocks with stable earnings like consumer staples, basic transport, and specific commodities.
- My five stock picks BG, ANDE, TSCDY, TSCDF, WFG, KNX are considered Strong Buys now based upon our quant ratings and stand to benefit from either a rally or even in a bear market.
As we wrap up the first month of the new year, the 2022 markets are volatile, and investors are concerned. Last year ended with tremendous gains and the S&P 500 up 26.89% to end the year, the Dow and Nasdaq gaining 18.73% and 21.39%, respectively. Now, rising concerns over the markets and performance year-to-date have investors and traders wanting to know if we experience a bear market, what stocks are good buying opportunities? As such, I am outlining my top 5 stocks to buy during a bear market.
What Is a Bear Market?
A bear market occurs when the market experiences a price decline of 20% or more. It’s hard to put a time on a bear market. While conventional wisdom may say that it lasts at least two months with an average of 349 days from recent highs, typically resulting from widespread fear and negative sentiment like we’re currently experiencing. However, as we experienced in 2020, bear markets can be shorter in duration, as evidenced by the bear market that lasted 23 trading days, from late February through late March.
Since December 31, 1994, global equity markets experienced four bear markets when the S&P Global BMI TR declined 20% or more. The chart below shows that the most resistant sectors, consumer staples, health care, and utilities did not experience the drawdown.
While the S&P 500 index, DJIA, and Nasdaq are not in bear territory, a number of tech stocks have fallen into a bear status, along with the Russell 2000, a small-cap index is about 20% off its high and the Russell 2000 Growth ETF is close to 25% of its high.
Nasdaq 100 Tech Stocks Drawdown
We’re not in a bear market at this time, but it’s essential to be on alert and looking for investments that can thrive even in corrections. We want people to consider the best stocks to buy in any market, but this article focuses on buying the best stocks for a bear market. Historically, these have been stocks with stable earnings like consumer staples, basic transport, and commodities – defensive stocks essential for everyday use. Noncyclical stocks tend to maintain stable growth, no matter the state of the economy, and market downturns can be overwhelming and create fear as investors watch their holdings fall. Many of the fears in this environment stem around the following:
Fed interest rate hikes
Supply chain issues
Military tensions in Eastern Europe
Renowned investor Peter Lynch said, "The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn't changed…People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences."
So how do investors get ahead and position portfolios with stocks that can hold their investments steady or even grow if a significant correction or bear market happens? While many people buy the dip and pursue riskier asset classes, others are charting a course for turmoil and an extended volatile period. If you fall in the latter fleet, please focus on companies with strong fundamentals and defensive traits. Most of us have a goal of long-term wealth accumulation, but also want to limit the downside, which is why I have selected five defensive stocks to watch. The five core factors that we look at with stocks are Value, Growth, Profitability, Momentum, and EPS Revisions. To do this, we compare the relevant metrics for the factor in question for the stock to the same metrics for the other stocks in its sector. The factor is then assigned a grade, from A+ to F. Each of these factors can serve as a defense in its own respect as follows:
Value - Helps to avoid companies that may be mispriced and overvalued. Investors typically do not want to buy high and sell low. You want to buy companies at a discount, below the perceived intrinsic value and watch them grow.
Growth - If a company is not experiencing growth in metrics like Free Cash Flow, EBITDA, and YoY Revenue, it's more susceptible when a bear market or correction hits because growth or profits allow you to be defensive in periods of slowdown. If a company is not growing prior to periods of slowdown, any disruption in business or if they’ve been stagnant or decelerating can be devastating. Growth is healthy.
Profitability - As with growth metrics, profitability is important. If a company is unprofitable, it is more vulnerable. Revenue typically slows during periods of volatility and therefore companies are likely to experience more struggles during recessions or bear markets because they do not have the cushion to withstand those drawdowns. Focus on companies with profits and strong profitability metrics.
Momentum indicates a stock’s price strength and compares the differences at varying time intervals. Comparing a company’s price performance relative to others in its sector is a great tool to understand the rate at which the price of the company is changing. Stocks that rise very quickly in short periods of time may also crash just as quickly.
EPS Revisions - Typically analysts are most privy to the interworkings of each stock because they’re in constant communication with senior management. Positive revisions indicate that the future is bright and the particular stock is heading in an upward direction. Typically one can arrive at the assumption that a company is stronger or in a better financial circumstance to withstand volatility if there are up versus down revisions.
Each Quant Ratings and Factor Grades is displayed on the symbol pages for their respective stocks. Let’s dive into some of them and our top 5 best stocks to buy in a bear market.
BUNGE Limited (NYSE:BG) Quant Ratings and Factor Grades
1. Bunge Limited (BG)
Bunge Limited (BG) is a consumer staple focused on agricultural products. The world's largest oilseed processor, BG has partnered with Chevron Corporation (CVX) in a joint venture to meet the demand for renewable fuel. I’ve selected this stock as a top pick in a bear market because BG is at the front-end of the supply chain and given the inflationary environment and it being in the agribusiness producing food, they are a price driver; any increases in costs can be passed on to the consumer, as we’re currently seeing with food prices approaching record highs. In addition to a growing population and demand for food, agriculture, and renewable energy sources, Bunge is an excellent value and dividend stock.
Having an overall A- valuation, BG’s underlying valuation metrics look strong. In addition to increasing demand for goods, BG comes at a great price point under $100/share. With an A+ forward P/E ratio trading -67.54% below the sector and a PEG of 1.21x, before the interest rate hikes, now would be a great time to get a piece of this stock.
In addition to BG being a great value play and opportunity in terms of price appreciation, its dividend grades are attractive. Bunge has a strong forward dividend yield of 2.13% and as we look at the below grades, all are solid. According to my backtest, an A- dividend safety rating indicates that this stock is likely to avoid 99% of dividend cuts.
Underlying dividend safety includes metrics for profitability, debt, analyst dividend estimates and revisions, momentum, economic and industry factors, which help you avoid stocks that could cut or suspend their dividend. This indicator provides the best shot at preserving capital and minimizing downside risk.
Bunge has been rated a strong buy since November 2021. With impressive earnings over the last two consecutive quarters, BG continues to see a revenue rise of 39.17% YoY. Q3's $14.12 billion was 27.3% higher value than most of the Food Processing industry and 17.42% higher than Consumer Non-Cyclical sector. For the quarter, the company beat Non-GAAP EPS of $3.72 by $2.30; GAAP EPS of $4.28 beats by $3.01; Revenue of $14.12B (+39.0% YoY) beats by $230 million.
As BG continues to grow, Bunge recently announced its acquisition of a 33% stake in a Brazilian-based agrochemical firm named Sinagro, a grain and agricultural products reseller. In the same announcement, Rossano de Angelis Junior, BG Agribusiness VP, said, "This transaction will contribute to Bunge´s grain origination capabilities and to its access to producers in the region. In addition, Sinagro and Bunge are closely aligned on their global vision of being the preferred partner in sustainable solutions for oilseeds, commodities, and related ingredients, both for farmers and end customers."
2. The Andersons’s Inc. (NASDAQ:ANDE)
An agricultural company with a 1.24B market capitalization and one-year share price increase of more than 55%, The Andersons, Inc. (ANDE) is an attractive stock pick. Ande is in the food distribution sector and operates in four segments: trade, ethanol, manufacture, and distribution of plant nutrients, and rail. Following three robust back-to-back quarters, ANDE’s latest Q3 earnings beat record earnings, resulting in shares trading up nearly 7% following the announcement.
Since 2006, Anderson Inc. and its ethanol business partnership with Marathon Petroleum (MPC) has been a consistent growth driver. With inflation and the increase of prices all around, ANDE stands to benefit and will certainly capitalize on the surge in food prices, resulting in improved margins. ANDE is quite diversified in its product lines and is also making strides into renewable diesel to go green. This will add an additional catalyst for EBITDA growth.
ANDE reported a YoY improvement of $20.7M for 21Q3. Additionally, Andersons raises its dividend nearly 3% to $0.18/share quarterly, which should bode well with investors, emphasizing the strength of their profits. During the Q3 earnings report, President and CEO Pat Bowe said, "We benefited from outstanding execution by our team, strong demand, and relatively low grain stocks - including growth in new markets, such as renewable diesel and supply chain extensions." On December 16, 2021, Andersons declared a $0.18/share quarterly dividend, a 2.9% increase from the prior dividend of $0.17. The Anderson's is currently trading at a great price, under $40, which I consider a reasonable price point for purchase.
3. Tesco PLC (OTCQX:TSCDY), (OTCQX:TSCDF)
Tesco PLC is a food retail company with a market capitalization of $31.11B. With the disruption of the pandemic, Tesco explored new ways for customers to shop, expand the online business, and shift to delivery. “Needless to say, 2020 was a great year for grocery retailers. According to IGD, the unprecedented 8.5% growth in 2020 will slow to 1.7% in 2021 and then to 0.9% in 2022, as shoppers economize and the eating out industry reclaims sales,” writes Unlocking Alpha.
The grocer retail business is highly competitive, and in addition to adapting, Tesco managed to increase its customer base during the pandemic. “COVID-19 led to a greater focus on celebrating at home…As a result, we outperformed the market, growing market share and strengthening our value position,” said Tesco CEO Ken Murphy on Yahoo. As shown above, in Tesco’s Factor Grades, its overall grades are stellar. Possessing an A+ for growth, with EPS Forward Long Term (3-5Y CAGR) at 32.83%, and Operating Cash Flow Growth of 227.38%, this grocer is doing well, resulting in one FY1Up Revision in the last 90 days.
Tesco Profitability and Momentum
Profitability stands at a B+ grade, where Cash from Operations sits nicely at $1.51B, and Tesco’s return on assets is an A. This stock has been on an upward trend since the summer of 2021, and the momentum persists. With a solid A Momentum grade and 3-month, 6-month, and 9-month price-performance outperforming the sector median get this stock at a value!
Tesco is at a great price, less than $15/share, and over the last year, TSCDY has seen a price increase of +24% and a 5-year increase of +68%. “Tesco is cheap at the moment, trading at 1.2x book value and at 0.37x TTM sales. Given the low valuation, I think that TSCDF deserves a small allocation in a diversified portfolio,” writes Unlocking Alpha.
This company’s overall valuation grade is a B+, and with a forward EV/EBITDA ratio of 7.57x, it is outperforming a good number of its sector competitors. The Global Investor writes, “Tesco's strong performance over the pandemic has given me trust in the new management team. Its commitment to shedding non-core assets means shareholder returns are imminent.
4. West Fraser Timber Co. Ltd. (NYSE:WFG)
West Fraser Timber (WFG) is a diversified wood products company that stands to benefit in the current environment, as well as if we go into a bear market. With the real estate boom, forest products are in demand as homebuilders cannot construct homes fast enough to keep up with demand. If we anticipate a bear market, sentiment for this industry typically hedges towards a recession, and naturally, housing demand decreases, which could hurt timber. But since real estate is doing well and there’s high demand, the risks are minimized, and the timber sector should stand to benefit. Given how much the timber price has fallen since 2020, it appears to have normalized, and buying a fundamentally sound company like WFG may be an excellent addition to your portfolio. Get WFG at a value. This company has stellar metrics, including an A valuation grade with A+ underlying metrics for its P/E ratios and PEG GAAP (TTM).
Trading significantly below the sector average, there is a great buying opportunity for this stock whose share price is on an upward trend. As Fellow Seeking Alpha writer Daniel Moser states, “Bottom line for me is that at 2.2x EV/EBIT, WFG shares are still trading at ridiculously cheap multiple.”
WFT has continued to be successful in its approach to growth through a number of strategic acquisitions and 2022 growth drivers as outlined by research analyst Yiannis Zourmpanos. Favorable demographics like millennials who are first-time buyers of homes are aiding in WFG’s growth. In addition, positive sentiment around supply chain constraints and an increase in consumer demand for timber, leading to retail and residential demand for homes and lumber products in stores have boosted their growth. WFG has also benefited from a number of strategic acquisitions while maintaining costs. "Our cost management is critical to our success. When lumber markets change, it means we can adapt quickly to keep our mills running and our employees working," said Ray Ferris, WFG President, and CEO. The WFG growth metrics are green, year-over-year revenue has increased 155.40%, and forward EBITDA Growth is an A+ at 138.88%.
WFG Profitability and Momentum
Sawmills have cranked up production despite a plunge in lumber prices last month, and soaring costs and transportation issues are posing concerns for the record-high demand prompted by the building boom. But that does not appear to be affecting the growth, profitability, or momentum of this stock. All with steller A+ overall grades, West Fraser Timber, is climbing fast. WFT profitability is tremendous as Cash from Operate is at $3.59B and gross profit margins are 57.75%, making the below figures for momentum no surprise.
5. Knight-Swift Transportation Holdings Inc.
Knight-Swift Transportation (NYSE:KNX) and its subsidiaries are one of the largest truckload carriers in North America. The transportation services provider supplies transport solutions in the U.S., Mexico, and Canada, and the services include varying types of products, goods, and materials, dry and refrigerated. With a B- Valuation grade, its valuation is very reasonable given the high demand for truckers to transport the products in high demand and facing supply-demand issues. Its PEG ratio is an A+ at 0.46 indicating how undervalued the company is at this time, and as it's trading at $57.19/share, KNX is a great buy at a discount.
The financial health and growth prospects of KNX are strong and indicate the potential to outperform in the market. As trucking demand soars, companies like KNX are able to capitalize on core growth drivers within the industry in a healthy recovering economy on the upswing. Transportation is on the upswing as the demand for goods and drivers continues to grow. Vaccine distribution and the economic reopening is a driving force behind economic growth because the trucking industry is the primary source of delivery of goods. In addition, consumer purchases have gone up whether online or at retail locations, and those deliveries to homes or stores are only possible through trucking.
KNX’s latest Q4 Earnings Announcement was stellar and returned EPS of $1.61, which beats by $0.18, and Revenue of $1.82B beats by $84.65M. The A+ Revisions grade includes 19 FY1 Up revisions in the last 90 days and zero down.
In addition to great growth prospects, KNX’s Profitability is at an A- with Cash from Operations at $1.19B and EBITDA Margin (TTM) of 25.77%. Before year-end 2021, KNX announced the acquisition of Midwest Motor Express, another transportation provider. “The $150 million purchase price translates into a 1.1-time sales multiple based on $137 million in revenues. That said, the business is quite profitable as the $27 million EBITDA contribution comes in at less than 6 times while the operating income contribution of $16 million reveals a less than 10 times multiple paid on that metric. This means that at least six cents in earnings per share accretion are expected, with more to come following the integration,” writes The Value Investor.
Again, we are not officially in a bear market at this time, but it’s essential to be on alert and looking for investments that can thrive even in corrections. For investors that want to consider the best stocks to buy in a bear market, this article focuses on buying the best stocks for that environment. Identifying stocks in the right sector is important for investing in a bear market. Our Factor Grades and Quant Ratings can help you make tactical investment decisions that are vital, especially if you're picking stocks without changing your overall risk level. Finding knowledgeable investment resources is also a great way to be a successful investor in volatile or rallying markets.
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This article was written by
Head of Quantitative Strategies at Seeking Alpha.
Data analysis and interpretation have taken center stage in my career. For my purpose, the interpretation of data is the process of making sense of statistics that have been collected, analyzed, and scored. This skill-set has served as a solid foundation for me to identify trends and make transparent predictions in the course of money management. It has also allowed me to develop user-friendly web-based tools that furnish individuals with the indicators and signals to instantly interpret the strength or weakness of a company's value. Importantly, this expertise has helped me build Wall Street trading desks, launch international hedge funds, and construct a SaaS FinTech investment research company.
Prior to my role at Seeking Alpha as the Head of Quantitative Strategies, I founded a Hedge fund and Asset Management company (Cress Capital Management), I was the Head of International Business Development at Northern Trust, and the majority of my career was at Morgan Stanley running a proprietary trading desk.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given that any particular security, portfolio, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security or other matter. You alone are solely responsible for determining whether any investment, security or strategy, or any product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. The author is an employee of Seeking Alpha. Any views or opinions expressed herein may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.