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3 Stocks for the Next Bear Market

By Chuck Saletta - May 19, 2021 at 10:30AM

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A roaring bear market just might be your best chance to buy strong businesses at cheap prices.

Bear markets can be an incredible time to pick up stocks at a bargain. When panic grips Wall Street, even strong businesses with solid balance sheets and tremendous long-term prospects can get taken down with the overall trend. Still, the strongest companies are often the ones that come back the fastest once the bear market passes. That makes it important for you to have a plan in place in advance, so that you know where you want to hunt when deals are available.

If you follow this strategy, know that you're in good company. Bargain hunting during a bear market is a strategy that Warren Buffett has used successfully throughout his investing career. Indeed, he profited handsomely during the financial crisis of 2008 by having both the cash and the wherewithal to buy strong companies while so many others were panicking. With that in mind, here are three stocks that are certainly worth considering for your potential buy list during the next bear market.

Warren Buffett

Image source: The Motley Fool.

1. Buffett's own bargain-hunting powerhouse

There's an old saying in business and investing that if you can't beat them, buy them. With that in mind, what better business to look to potentially buy at a bargain price than Buffett's own Berkshire Hathaway ( BRK.A 0.71% )( BRK.B -0.05% )? After all, there is nobody better at bargain hunting than Buffett, and he is likely training his successors at the company to be able to follow in those footsteps as well.

Although Berkshire Hathaway's fundamental business and balance sheet are likely always going to be strong, there's a good chance that its stock might get knocked down in the next bear market. This is because mark-to-market accounting forces it to record earnings or losses based on the changes in value in its investment portfolio. As a result, if the stocks it owns drop in value, it may have to record an accounting loss, even if the underlying businesses it operates continue to generate cash.

That could cause Berkshire Hathaway to fall during a general market panic, driven by investors and algorithms that don't look past the headline numbers and into the fundamental health of the company. If that happens, it could very well be the perfect company to buy during a bear market. After all, if it is sweeping up bargains with its cash pile while its own stock is down, then investors who buy its stock could benefit from a rebound when those mark-to-market losses reverse.

2. A tech titan whose products people pay a premium to own

Apple ( AAPL -0.61% ) is well known for being able to charge premium prices for its hardware. That's wonderful news for shareholders in a strong economy, but it also means that consumers feeling the pinch may choose to hold off on upgrading during tougher economic times. That risk means that Apple could see its stock decline a bit more than otherwise might be expected during a bear market.

Apple has a wonderfully strong balance sheet, with more between cash on hand and receivables than it owes in total debt. That means that it can withstand even a punishing recession and bear market and still have a very strong chance of emerging in good shape.

The challenge with buying Apple's shares today is that it has a market capitalization over $2 trillion and a price-to-earnings ratio above 28. As a result, it is quite possible that much of its future growth may already be priced into its shares.

Apple is an incredibly solid company, and it's one that might look mighty tempting at a cheaper valuation. It might take a pretty substantial bear market to get that opportunity. If the upside of a bear market is the chance to buy a great company at a decent price, then the potential longer-term gain just might be worth the short-term pain.

3. A Civil War-era infrastructure leader that's still relevant today

A train on a viaduct.

Image source: Getty Images.

Union Pacific ( UNP 2.93% ) was founded in 1862, as the U.S. Civil War was raging. It's a testament to just how critical railroad infrastructure was even back then that the legislation enabling its creation was signed into law as the country was tearing itself apart. That the company has survived over a century and a half showcases how relevant railroads remain today.

After all, products still need to be transported from where they're made to where they're used, and railroads tend to be a fairly cost-effective way of doing just that. The continued demand for its services makes Union Pacific a company worth considering for a long-term investment. The challenge, though, is that since the value of its infrastructure is well known, thanks to the recent strong market, its shares are not exactly cheap. In fact, those shares trade at more than 23 times the company's anticipated earnings.

At a price like that, it's hard to justify adding to an investment in Union Pacific, even though the business looks capable of remaining solid well into the future. Still, should a bear market come knocking and take the company's stock down, its long history and strong infrastructure role makes Union Pacific worth considering at a more reasonable price.

When a bear market comes roaring, bargains abound

It's easy to invest when stocks are rising strongly. When a bear market comes roaring and your investments start to tank, it's a lot harder to keep your head about you. Knowing in advance what strong companies you'd love to buy if their shares got cheaper during a market crash is a great way to keep your wits about you. It can help you take advantage of the bargains that only come around during a panic to help you potentially build some incredible long-term wealth.

Berkshire Hathaway, Apple, and Union Pacific all stand out as very strong companies that look capable of surviving the next bear market and emerging even stronger on the other side. If you keep an eye out for them to become bargain-priced, during the next bear market you just might find yourself with an opportunity to buy some great businesses at very reasonable prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$163.76 (-0.61%) $-1.01
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$423,563.99 (0.71%) $2,997.99
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$278.96 (-0.05%) $0.13
Union Pacific Corporation Stock Quote
Union Pacific Corporation
UNP
$240.08 (2.93%) $6.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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