Bear markets can be nerve-wracking, but lower stock prices and valuations also set patient investors up for wealth-building gains. However, you want to think carefully about what kind of company you want to own when things get bad. Some companies are more economic-sensitive than others, but the most resilient companies are those that can sustain sales even during a recession.
Costco Wholesale might have the most resilient business of all. Even factoring in the annual $60 membership fee, consumers save money with the volume discounts on everyday essentials. The company sells so cheaply that the membership fee is a significant contributor to its bottom line.
Comparable sales remained strong during the pandemic, and the current inflationary environment seems to be sending more people in search of value, which is good news for Costco. The stock has surged to new highs in recent weeks, as investors anticipate strong results in the near term. The company's October sales results showed comparable sales accelerating to 11.8% compared to 9.4% in September, 9.1% in August, and 8% in July.
Costco also excels with its corporate culture. The average employee tenure at Costco is nine years, and its average hourly salary ranks among the top of U.S. retailers. What's more, Costco likes to promote from within its ranks, which lends to its consistent performance over the years.
Despite all the things to love about Costco, I wouldn't want to buy the stock right now. The shares have shot to the moon and trade at an expensive price-to-earnings ratio of 48. If a bear market drags the stock down with it, this is an outstanding company I would buy in a heartbeat at a lower valuation.
Netflix's subscription-based business model and affordable pricing make it a very resilient business to buy during a recession or bear market. This was on display last year, when millions of people were out of jobs temporarily due to the pandemic, but Netflix still reported accelerating growth in global paid subscriber memberships.
People are just not going to give up their Netflix habit. For one thing, the content selection is getting too good. For the price of a few coffees, subscribers have access to the widest slate of shows and movies of any streaming service. A record 142 million households watched the latest hit show Squid Game in September, and Netflix's future growth should expand its content budget to create many more hits.
Netflix has been one of the best growth stocks to own for many years. A $1,000 investment 10 years ago would be worth over $60,000 today. The stock likely won't repeat those returns by 2030, but it could certainly turn $1,000 into $3,000.
Analysts see a path to at least 500 million subscriptions worldwide, which is more than double the 213 million reported for the third quarter. Plus, investors can look forward to management's shifting focus toward increasing operating profits over the long term. I would look to add Netflix shares during any market dip.
Top video game maker Activision Blizzard is not quite as resilient as Netflix or Costco, but it's close. The attachment that millions of people have to Netflix is comparable to the loyalty many gamers have to their favorite video games. Activision finished the last quarter with 390 million monthly active users across all its games, including more than 100 million who play the popular Call of Duty first-person shooter.
One reason Activision has a resilient business model is that most of its sales come from spending on relatively affordable items like virtual currency in Call of Duty. Call of Duty points can be purchased for as little as $1.99 and serve as the in-game currency for unlocking extra content in the game. Revenue from in-game spending, subscriptions, and other items made up nearly 75% of total revenue through the first nine months of 2021, while new product sales made up the balance.
The in-game spending portion of the business provides a much smoother, year-round stream of revenue for Activision Blizzard. While premium game releases can cost $60 or more on console, most players tend to stick with the same title for months at a time thanks to frequent game updates.
Moreover, digital sales from in-game spending tend to generate a higher profit margin. Over the last year, the company generated $2.8 billion in free cash flow on $9 billion in revenue. It has a strong balance sheet, with a net cash position of $6.1 billion. The stock already looks like a good deal, trading at 16.9 times trailing free cash flow, so any further decline in the share price would make this stock a real bargain.