Last year, things couldn't have gone more swimmingly for the stock market. The Federal Reserve was intent on maintaining its dovish monetary stance, and historically low interest rates were fueling hiring, acquisitions, and innovation throughout the tech sector.
But, oh, what a difference a year can make!
Last week, the U.S. Bureau of Labor Statistics reported that the trailing-12-month inflation rate hit 8.3% in April, which is just a hair below its 40-year high. Although some aspects of inflation have been out of the Federal Reserve's control (e.g., Russia invading Ukraine), hindsight has demonstrated that the nation's central bank left its foot on the accelerator for far too long. Keeping interest rates near historic lows for years -- including purchasing long-term bonds via quantitative easing -- looks to be a key reason the Nasdaq Composite has lost more than a quarter of its value and pushed firmly into a bear market.
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But if there's a silver lining in the stock market's struggles, it's that fear historically breeds opportunity for patient investors. Every single notable decline throughout history has eventually been erased by a bull market rally.
What follows are three of the smartest stocks investors can buy in a Fed-induced bear market.
NextEra Energy
The first genius buy in a Fed-driven bear market is the nation's largest electric utility stock, NextEra Energy (NEE 0.34%).
First and foremost, electric utility stocks provide a basic necessity service. If you own or rent a home, there's a very good chance you need electricity to power the appliances in your home. Demand for electricity doesn't change much from one year to the next, which leads to highly predictable cash flow for utility companies. This cash flow transparency is what allows a company like NextEra to set aside capital for new infrastructure projects and acquisitions without adversely impacting its profitability or dividend.
What really sets NextEra apart from its competition (why it has such a large market cap relative to other utility providers) is its focus on renewable energy projects. No utility is generating more capacity from wind or solar power than NextEra -- and that's unlikely to change anytime soon. The company has pledged up to $55 billion in spending on infrastructure projects between 2020 and 2022. What's more, Energy Resources, the renewable energy arm of NextEra Energy, expects its renewable energy and storage projects to total between 22,675 megawatts (MW) and 30,0000 MW between 2021 and 2024.
Although renewable energy projects can be pricy, and NextEra's management team is likely disappointed that borrowing rates are climbing, these investments are well worth it. Not only is NextEra Energy staying ahead of potential green-energy policy changes from Capitol Hill, but it's also significantly lowering its electricity generation costs. As a result, NextEra has consistently grown by a high-single-digit percentage for more than a decade. That compares to low-single-digit growth for much of the utility sector.
Considering that NextEra has delivered a positive total return, including dividends, to its shareholders in 19 of the past 20 years, it's a smart buy in an unsettled market.
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Alliance Resource Partners
Another really smart stock to buy in a Fed-induced bear market is coal producer Alliance Resource Partners (ARLP -0.33%).
Two years ago, the previous sentence would have been a ridiculous statement. During the initial stages of the pandemic, coal demand and per-ton pricing slumped, which exposed coal producers with leveraged balance sheets. Thankfully, Alliance Resource Partners wasn't among them. However, demand weakness and uncertainty tied to COVID-19 did force the company to forgo its dividend for a year.
But things have changed drastically since spring 2020. The per-ton price for coal has increased by 137% just since the beginning of 2022, and has jumped roughly eightfold since the 2020 low. With most energy companies unable to aggressively invest in infrastructure during the pandemic, supply chain constraints are expected to keep coal prices elevated for the foreseeable future.
What investors will appreciate about Alliance Resource Partners is the company's ability to lock in volume and price commitments well in advance. According to the company's first-quarter report, over 90% its forecast 35.5 million tons to 37 million tons are already locked in for 2022. Further, 19.9 million tons of production are committed and locked in on price for 2023. This is a company that regularly commits production three to four years out to sustain transparent cash flow.
Alliance Resource Partners also has oil and natural gas royalties that should benefit the company for years to come. With crude oil and natural gas hitting multidecade highs, the company can expect a big uptick in royalty-based adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
If you need one more reason to trust in Alliance Resource Partners, consider this: Its supercharged dividend is back! The company is currently paying out a 7.4% yield and anticipates increasing its quarterly distribution by 10% to 15% per quarter through the rest of 2022.
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Vertex Pharmaceuticals
The third smart stock to scoop up during this Fed-driven bear market is specialty biotech company Vertex Pharmaceuticals (VRTX 0.10%).
The beauty of healthcare stocks is that they're highly defensive. No matter how well or poorly the stock market performs, people can't control when they get sick or what ailment(s) they develop. This creates a base level of demand that drugmakers, medical device companies, and healthcare service providers can expect in any economic environment.
The differentiating factor that makes Vertex Pharmaceuticals special is its focus on treating patients with cystic fibrosis (CF). CF is a genetic disease with no cure that's characterized by thick mucus production, which can obstruct a patients' lungs and/or pancreas.
To date, Vertex has developed four generations of mutation-specific CF therapies that work to improve lung function -- and it's currently working on its next-gen treatment. The company's most recently approved CF therapy, Trikafta, was given the green light five months prior to its scheduled Food and Drug Administration review date, and is on pace to generate $7 billion in sales this year.
Beyond its CF treasure trove, Vertex has more than a half-dozen compounds in development. While some of these therapies are being developed internally, others, such as CTX001 for beta thalassemia and sickle cell disease, are partnered projects. Given Vertex's solid drug-development track record, there's a good chance at least some of these treatments will reach pharmacy shelves.
A final reason to be excited about Vertex is the company's cash-rich balance sheet. Sporting $8.24 billion in cash, cash equivalents, and marketable securities (and no debt), the company has ample capital to continue its research and perhaps even do some shopping of its own.
With north of $15 per share in earnings forecast by Wall Street in 2023, Vertex has shown no signs of slowing down.
