It's been a difficult start to the new year for the investing community. Both the benchmark S&P 500 and widely followed Dow Jones Industrial Average dropped into official correction territory (a decline of at least 10%), marking their biggest respective slides in two years.
Things have been even more challenging for the technology-focused Nasdaq Composite (^IXIC -1.82%). Between mid-November and mid-March, the Nasdaq lost 22% of its value, thereby pushing it into a bear market.
Superficially speaking, bear markets can, at times, be scary. Since we can't predict when market drops will occur, how long they'll last, or how steep the decline will be, emotions have the potential to get the best of investors in the short term.
However, things are quite clear over the long run: Every notable drop in the broad-market indexes has eventually been erased by a bull market rally. In other words, buying great companies on the dip and being patient is a proven formula for wealth-building.
With the Nasdaq Composite having fallen well off its all-time high, now is the ideal time to buy the following three exceptionally safe stocks on the dip.
Even though the semiconductor industry is highly cyclical, chipmaker and solutions provider Broadcom (AVGO -2.67%) is one of the safest stocks investors can add to their portfolios on the dip in the Nasdaq.
Cyclical industries thrive when the U.S. and global economy are booming and struggle when recessions strike. Since recessions are an inevitable part of the economic cycle, it's always possible that the Federal Reserve's interest rate hikes and balance sheet deleveraging pushes the U.S. economy into a recession. But there are a number of important factors working in Broadcom's favor, even if a recession were to occur.
First, consider the disparity in length between recessions and periods of economic expansion. Recessions typically only last for a few months or a couple of quarters. By comparison, economic expansions often go on for years. A company like Broadcom is perfectly positioned to take advantage of growing demand for wireless solutions over time.
Broadcom is also in the sweet spot of its growth cycle thanks to the 5G wireless revolution. It's been about a decade since wireless download speeds were meaningfully improved, which means the rollout of 5G wireless infrastructure by telecom companies should lead to a persistent device upgrade cycle. Broadcom generates most of its sales from the wireless chips and solutions offered in next-generation 5G-capable smartphones. Since it'll take years to upgrade wireless infrastructure to 5G, Broadcom's runway to benefit from this expansion should last through at least the midpoint of the decade.
Additionally, Broadcom has ample opportunities to grow outside of smartphones. The company sells connectivity and access chips that are used in data centers, as well as provides solutions used in next-gen vehicles.
But arguably the top selling point for Broadcom is that it's booked production through 2022 and into 2023, according to CEO Hock Tan. Booking production this far in advance should lead to highly transparent cash flow and strong pricing power. This transparent cash flow is a big reason Broadcom's quarterly dividend has grown by more than 5,700% in less than 12 years.
The beauty of healthcare stocks is they're highly defensive. Since people don't control when they get sick or what ailment(s) they develop, there's always demand for prescription drugs, medical devices, and healthcare services. More specific to Exelixis, a bear market decline doesn't change the fact that cancer patients need its therapies.
Exelixis' lead drug, Cabometyx, is what makes it tick. Last year, the cabozantinib franchise of products topped $1 billion in sales for the first time. Cabometyx is currently approved to treat first-and-second-line renal cell carcinoma, as well as previously treated advanced hepatocellular carcinoma. These indications alone should continue to deliver steady growth for Exelixis.
But management is expecting much more from their lead drug. Cabometyx is being examined in more than five dozen clinical trials as a monotherapy or combination therapy. While not all these studies will yield success, even a handful of successes and label expansions can lift Exelixis's lead drug from the $1.08 billion in annual sales recorded last year to more than $2 billion.
Something else to consider is that Exelixis is generating a mountain of cash from the sale of Cabometyx. The company ended 2021 with close to $1.9 billion in cash, cash equivalents, and restricted cash and equivalents. That works out to a quarter of the company's current market cap and should provide a healthy downside buffer for shares if the Nasdaq moves significantly lower.
Furthermore, this cash is being used to reignite Exelixis' internal growth engine and spur collaborations.
Exelixis offers sustainable double-digit sales growth for a forward-year earnings multiple of just 20. Tack on its cash hoard, and you have a very safe biotech stock that can lead you through the market's ebbs and flows.
The name "Berkshire Hathaway" might not ring a bell with a lot of investors. But its CEO, billionaire investor Warren Buffett, is quite well-known. Since Buffett took the helm as CEO in 1965, he's led Berkshire Hathaway to an average annual return of better than 20%. In aggregate we're talking about a total return in excess of 4,200,000%.
But there's more to like about Buffett's company than its performance over the past 57 years. One of the reasons Berkshire Hathaway is such a success is its cyclical ties. As noted, recessions tend to be short-lived, which allows cyclically driven companies plenty of time to thrive in the sun. The vast majority of Berkshire's investment portfolio is tied to the cyclical tech, financial, and consumer staples sectors. In short, patience has paid off handsomely for those who buy and hold Berkshire Hathaway stock.
Another reason to like Buffett's company is its financial stock ties. With the U.S. inflation rate hitting a four-decade high of 7.9% in February, the Federal Reserve is expected to get aggressive with interest rate hikes. This means Berkshire's bank stocks are liable to see a boost in net interest income from their variable-rate outstanding loans. It'll be positive for Berkshire's insurance holdings, too, with insurance stocks able to generate extra interest income on their float (i.e., unused premium).
The company's investment portfolio is also packed with dividend stocks. Companies that pay a dividend have a rich history of outperforming their non-dividend-paying peers over the long run. This year, Berkshire Hathaway should easily clear $5 billion in collected dividend income, with more than $4 billion in payouts coming from just six stocks.
Berkshire Hathaway is a pillar of stability in a volatile market.