With the market at record levels in what has been the longest bull market in history, an investor can be forgiven for feeling a little wary. Although we don't know when the bull market will end, one thing we do know is this: It will end sometime. And following a bull market which has taken share prices up 380%, a bear market would probably be a gut-wrenching one.
The good news is this: Although history has shown that bear markets inevitably follow bull markets, they tend to be shorter in duration and are generally followed by a period in which stock prices rise to new highs. If this pattern continues, a long-term investor has the rare chance in a bear market to buy high-quality stocks at fire-sale prices.
What characteristics should a long-term investor look for in a stock? An investor should look for those qualities which provide comfort through the vicissitudes of stock market cycles: size, consistent earnings and dividend growth, and balance sheet strength. Johnson and Johnson(NYSE:JNJ), Accenture(NYSE:ACN), and Medtronics (NYSE:MDT) are three stocks that fit the bill.
1. Johnson & Johnson
Johnson & Johnson is the world's largest and most diverse healthcare company, with exposure to pharmaceuticals, medical devices, and consumer products. Earnings growth has been remarkably consistent, with adjusted earnings per share (EPS) -- which excludes one time, non-recurring charges or benefits -- never falling year over year in the past 20 years. This is a tribute to J&J's many competitive advantages, which are sourced from intellectual property, switching costs, and branded products.
The company is also a Dividend Aristocrat, having raised its dividend 57 years in a row. Finally, J&J is one of only two companies with a triple-A credit rating, providing it with the financial capacity to withstand any prolonged downturn.
Accenture is one of the world's leading provider of management consulting and technology servicing. The company benefits from high switching costs, which discourages customers from moving to the competition. Adjusted earnings have risen sevenfold since 2001 and suffered a decline only once -- in the aftermath of the Great Recession.
The company has little to no debt on its balance sheet and generates free cash flow more than triple its annual dividend -- which has enabled a dividend growth streak of 14 consecutive years. Indeed, in the most recent quarter, Accenture announced that it would increase the frequency of its dividend payments from semi-annual to quarterly -- another sign of confidence.
Medtronics is the largest pure-play medical device maker in the world. The company derives its competitive advantage from technological innovation, high switching costs, and carefully nurtured relationships with physicians.
Adjusted EPS has risen every year in this millennium, and dividends have grown for 42 consecutive years. With free cash flow more than double the annual dividends paid out, this growth streak is likely to continue for the foreseeable future. Medtronics' balance sheet is strong, with debt at a quarter of total equity, resulting in a single-A credit rating.
Bear market buys
All three companies have consensus earnings and dividend estimates rising over the next three years, but even in the event of a recession earnings are likely to be well-supported given their historical track records. Valuations are currently above their historical averages, which is why a bear market would provide a rare opportunity. Just as one would relish the opportunity to buy a Tiffany(NYSE:TIF)bracelet at a discount, an investor should jump on any chance to buy Johnson & Johnson, Accenture, and Medtronics at prices below their intrinsic values.