With the Federal Reserve embarking on a massive rate hiking campaign, analysts fear for the worst. That brings bear market stocks into the picture.
The stock market is still quite near its all-time highs, at least judged by the major market indexes. However, there’s trouble brewing under the surface.
Certain speculative corners of the market such as technology stocks, SPACs, and cryptocurrencies have witnessed dramatic sell-offs in recent months.
People are starting to wonder if the economy will slide into a recession in 2023 as the central bank takes aggressive actions to curtail inflation. With stocks at elevated valuation levels, it’s a risky time to invest.
But there’s good news. There are stocks that perform well even during economic downturns. These seven bear market stocks should stand out as portfolio bulwarks during the next big downturn.
Going into 2022, defense contractors such as Lockheed Martin (NYSE: LMT) were trading at depressed valuations. At one point not too long ago, LMT stock was under 14x forward earnings.
That was a pretty unbelievable price, given the high quality of the underlying business and the guaranteed long-term contracts that defense companies have with the federal government.
The slide in the sector was primarily linked to the Biden administration’s decision to leave Afghanistan. As you might expect, with the conflict in Ukraine this year, governments are now pushing through increases to their defense budgets.
The austere positioning in the industry from last year has reverted to a more growth-focused outlook. It’s not just the U.S. either, countries like Japan and Germany have announced major increases to their defense budgets.
Some might argue that it’s too late to buy LMT stock, as it is up 23% year-to-date. Even so, it is still going for less than 18x forward earnings, which is hardly expensive. And given sharply rising geopolitical tensions overseas, look for the defense industry to be a major growth sector again going forward.
In any case, regardless of economic conditions, governments still pay their bills and national defense is always a priority. That makes Lockheed Martin a top-tier bear market stock to own.
Pinnacle West Capital (NYSE: PNW) is the parent company of Arizona electricity companies, including its primary holding, Arizona Public Service.
Pinnacle West serves nearly 1.3 million customers in and around the fast-growing Phoenix, Arizona market. Demographics are a big driver of utility stock performance, as long-term earnings growth tends to be driven primarily by population and business growth in a region. Arizona scores well on that front thanks to its warm climate and favorable tax rates.
PNW stock has lagged in the utility sector over the past year thanks to a dispute over overregulated rates. That’s a reasonable explanation for the weakness compared with its peers.
That short-term underperformance, however, offers opportunity. Even as most utility stocks have raced to new highs, PNW stock is still at a more reasonable valuation, and currently offers a 4.4% dividend yield.
Starbucks (NASDAQ: SBUX) shares have fallen 32% over the past year. This puts the world’s leading coffee chain back into a more attractive valuation range, with shares now under 25x forward earnings.
Sure, there are some issues now. The company is dealing with a major unionization effort at the moment. And its heavy bet on growth in the Chinese market is causing some anxiety as of late.
Getting past the headline news, however, Starbucks should be a solid bear market stock. During economic hard times, people value their little luxuries.
An overseas vacation or luxury car purchase may be out of reach during a recession, but a nice coffee and pastry is still on the menu. We saw Starbucks’ sales hold up far better than might have reasonably been expected during the Covid-19 lockdowns, and Starbucks should enjoy similar resilience during the next economic downturn.
Unilever (NYSE: UL) is a consumer staples company that makes a variety of food, cleaning, and personal care products.
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The company’s stock has been in a tailspin over the past year. That’s due to inflation, supply chain issues, and loss of revenues related to the conflict in Eastern Europe, among other matters.
However, at this valuation, Unilever is becoming quite the safe pick. Shares are selling for just 16x forward earnings and offer a 4.5% dividend yield. And while management has not run the company well in recent years, activists are now attempting to shake the company up.
One way or another, Unilever should return to better-operating results going forward. In the meantime, it offers a most generous dividend.
Kimberly-Clark (NYSE: KMB) is a leader in toilet paper, soap, and other such cleaning essentials. This briefly made KMB stock a hot one in 2020 at the height of the pandemic. Since then, however, sales have reverted to normal and Kimberly-Clark shares have slumped.
Indeed, KMB stock is now selling below where it did when the pandemic started. That’s pretty amazing. And down at current levels, it’s once again a great bear market stock to buy. When times get rough again, as they always do sooner or later, people will still want to buy things such as soap.
Earnings are down this year due to supply chain and inflation issues. Once those get sorted out, however, analysts see the stock at 18x 2023 earnings, which is a fine price for a defensive blue-chip such as this one. And with the latest sell-off, Kimberly-Clark’s dividend yield is up to an attractive 3.7%.
In some ways, water utilities are even safer than electricity and gas utilities. This is because there isn’t any generation risk with a water utility.
You don’t have the price of natural gas soar, a nuclear plant run over budget or so on. Water is one of the most basic human needs, and water utilities have — not surprisingly — generated exceptionally stable and robust returns over the decades.
Essential Utilities (NYSE: WTGR) is a water company hailing from Pennsylvania. It has offered steady results and a reliable dividend in recent years.
Shares have pulled back almost 10% off their recent highs, which is a fairly big move for a company with as little volatility as Essential.
The stock is now at 27x forward earnings, which is down from the 30+ levels where it often trades. Analysts also see earnings growth in the 6% to 7% annual range over the next years, which is pretty good by water standards.
Essential Utilities won’t make anyone rich overnight, but it can play great defense during a bear market. That plus a dividend yield that’s above the S&P 500 make it an easy stock to hold during a downturn.
Diageo (NYSE: DEO) is one of the world’s largest spirits companies. Its portfolio of brands includes leading marks such as Smirnoff, Johnnie Walker, Ciroc, Don Julio, and Guinness beer.
The company has a No. 1 or No. 2 brand in almost all the major types of spirits, making it flexible regardless of changing consumer demand.
In recent years, Diageo has prospered from premiumization, that is to say, selling higher-end bottles of liquor to customers.
Analysts expect that trend to continue, leading to further expansion of profit margins. However, in a down economy, alcohol sales tend to remain strong. People drink to celebrate the good times and to commiserate during the bad ones.
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Diageo spreads that consistency with its shareholders, as it has increased its dividend annually dating back to the turn of the century.
On the date of publication, Ian Bezek held a long position in LMT, UL, PNW, and DEO stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. Source: Nasdaq