Bear Market? Bring It!

It doesn't take a rocket scientist to see that we're in a recession, despite the so-called experts' happy talk several months ago. The economy's offering plenty of things to fret about, from the housing market's spectacular bust and ensuing credit crunch to the possibility that increasing inflation (stagflation, even) and unemployment will further pinch consumers.

As utterly terrifying as bear markets can be to the average investor, the truth is, they're inevitable. And many of the world's smartest investors will tell you that bear markets are the best time to invest in stocks.

Here's something to think about: The Leuthold Group, a Minneapolis-based money manager, did the research and concluded that we're in the jaws of a bear market 34% of the time. The rest of the time -- 66%! -- we're in a bull market. There's no such thing as a permanent bull market, but they do last longer than bear markets!

It stands to reason that those long, comfortable bull markets can get us into the mind-set that the good times will never end. Then we panic when things look bad, forgetting that they'll eventually recover. So let's all get a grip.

Run for cover in 2008?
In this volatile climate, stocks across the board have been knocked down by ills both real and imagined. The macroeconomic environment is undeniably scary, but while many companies have reported slowdowns owing to less-confident consumers, the market's dramatic drubbings have helped push many stocks to prices far below the point of any logic.

The following are good examples of companies whose stock prices have dropped precipitously, whether they deserved it or not:

Company

6-Month Price Decrease

P/E (TTM)

PEG Ratio

J. Crew (NYSE:JCG)

(35.1%)

20

1.05

Bank of America (NYSE:BAC)

(39.2%)

10

1.24

American Eagle Outfitters (NYSE:AEO)

(23.7%)

8

0.76

Middleby (NASDAQ:MIDD)

(41.5%)

14

0.58

GameStop (NYSE:GME)

(30.8%)

22

0.93

Data from Yahoo! Finance as of 6/26/08.

Now, I'm not necessarily banging the table on those specific stocks; I like some better than others, especially GameStop, which I suspect has been overly beaten up lately. (It's also a Motley Fool Stock Advisor recommendation.)

Of course, they could all suffer in the near term from a consumer-led recession, and I can't be shy about my bearishness on the financial companies like Bank of America. But these are good examples of historically high-growth, "pricey" stocks. And right now, they look like bargains for investors who have long-term horizons, and who believe that these companies have a sustainable competitive advantage.

Super-saver special SALE!
Everybody knows to buy low and sell high, but that's easier said than done. We've all fallen victim to thinking we were "wrong" about one of our stocks because of a double-digit decline, even when the strong fundamentals hadn't changed. Bull markets tend to make us feel like investing geniuses; bear markets can make us feel like we can do nothing right.

But remember: When the market's taking a licking, everything sounds all doom and gloom. Few headlines mention that, because of the gloomy market, many excellent stocks are on sale. It's your opportunity to go against the conventional wisdom and embrace the bear market.

Don't sweat the short term
When the short term is looking a little overcast, it's a great time to concentrate on (1) the long term and (2) owning great businesses.

As tough as things may seem right now, the prevailing pessimism means that opportunity abounds. If you hold your ground and buy quality stocks with solid long-term growth stories at sale prices, the future for your portfolio is very bright indeed.

If you're feeling uncertain, or if your list of great companies seems a bit thin, you could always check out Stock Advisor. The service debuted in April 2002, just as the 2001 recession was straightening itself out. Stocks we recommended within the service's first year or so have borne serious fruit: Consider BorgWarner (NYSE: BWA  ) , which has increased 225.5% since we recommended it in February 2003.

Although not all of our selections -- from 2002 or later -- show triple-digit increases, our average recommendation has outpaced the S&P 500 by nearly 40 percentage points since inception. If you'd like to do your due diligence, try the service free for 30 days.

This article was first published March 19, 2008. It has been updated.

Alyce Lomax does not own shares of any of the companies mentioned. GameStop, American Eagle Outfitters, and BorgWarner are Motley Fool Stock Advisor recommendations. Middleby is a Motley Fool Hidden Gems recommendation. Bank of America is a Motley Fool Income Investor recommendation. The Fool owns shares of American Eagle Outfitters. The Fool has a disclosure policy.


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