The S&P 500 is right on the cusp of entering a bear market, defined as a 20% decline from the recent peak. While bear markets can be brutal, they often provide the opportunity to buy high-quality companies at much more attractive valuations.
With an eye toward opportunity, we asked some of our contributors what stocks are on their bear market watch list. Here's why they're keeping an eye on steel producer Steel Dynamics (STLD 0.24%), waste and recycling company WM (WM -0.01%), and lithium mining company Albemarle (ALB -1.70%) to see if a bear market finally makes them a buy.
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A proven playbook
Reuben Gregg Brewer (Steel Dynamics): When it comes to steel mills, industry giant Nucor is generally considered one of the best. The co-founder and CEO of Steel Dynamics worked for Nucor before he went off to start his own company. Not surprisingly, he's using a very similar playbook to the one used by Nucor.
For example, Steel Dynamics uses eclectic arc mini-mills, which are more flexible than older blast furnace technology. The company is vertically integrated, owning scrap operations (a key steelmaking input), steel mills, and fabricating businesses. That last grouping is a key focus, as it allows Steel Dynamics to charge higher prices for its products, thus increasing margins. All of this is virtually identical to what has brought Nucor so much success, which includes an incredible 49-year streak of annual dividend increases under its belt. That's just one year shy of Dividend King status despite the fact that steel is a highly cyclical industry.
So why not just buy Nucor? Well, Steel Dynamics is a much smaller company and still growing rapidly. For example, its dividend streak is "just" 12 years long (it's a Dividend Achiever), but the annualized dividend growth rate over the past decade was an impressive 10%. For reference, Nucor's dividend growth rate was in the low single digits over that span. The stock is kind of pricey today, given that the steel market is doing well. But when Steel Dynamics' shares start to fall, dividend growth-minded investors should start taking a serious look.
I'd love to go dumpster diving for this stock
Matt DiLallo (WM): Investors have been bidding up shares of collections and recycling company WM for several years. The company currently sells for nearly 35 times its earnings and about 15 times its cash flow from operations, both historically high multiples. Because of that, its dividend yield has fallen to its lowest level in years at around 1.5%. That's despite 19 consecutive years of increasing the payout, including a 13% boost last year.
While I love the company -- it has delivered steady growth and consistently returns cash to investors -- I haven't added to my position in years because it's too expensive for my liking. However, I have it on my watch list to buy if a bear market takes it lower. When stocks tanked during the pandemic's early days, WM shares briefly traded at a much more attractive valuation of less than 24 times earnings, under 10 times cash flow from operations, and a dividend yield approaching 2.4%. I missed my chance to add at that time, so I wouldn't mind another opportunity.
In addition to the steady cash flow produced by its collections, disposal, and recycling business, another factor I like about WM is its investments in renewable natural gas (RNG). WM plans to spend $825 million through 2025 to expand its RNG output by 600%. These investments will capture methane produced by its landfills to power its entire fleet and provide 1 million homes with renewable energy. That will save it money, generate incremental income, and reduce carbon emissions.
While there's no guarantee that WM's stock will tumble in a bear market -- shares were recently 7% below their peak despite a nearly 20% decline in the S&P 500 -- it's one stock I'd love to buy if a bear market made it a lot cheaper.
A solid stock in a booming industry
Neha Chamaria (Albemarle): Sales of electric vehicles (EVs) are growing at lightning speed, and I wouldn't be surprised if nearly every growth investor owns EV stocks. Of course it hasn't been a smooth ride for many EV manufacturers, particularly start-ups, but the supply side of the industry is making a killing as global demand booms for EVs.
Prices of batteries and essential raw materials that go into the making of EVs and batteries are skyrocketing, which might explain why a stock like Albemarle is up 27% in the past three months as of this writing when the S&P 500 has plunged 12% from its peak. So whenever there's a bear market and Albemarle shares are knocked out, it's a good time to consider buying it if you're bullish about EVs.
Albemarle is one of the world's largest lithium mining companies. Most batteries that power EVs today are lithium-ion batteries, so it's safe to say Albemarle is in the right business at the right time. The company recently delivered stellar numbers for its first quarter, with its lithium sales rocketing 97% year over year. Albemarle also upgraded its sales guidance for 2022, backed by lithium prices that are only expected to rise further.
In fact, its end market is so strong that Albemarle just raised its guidance yet again, or twice in barely three weeks' time. Albemarle also sells bromine and catalysts, but the lithium segment brings in almost half its revenue right now. You'd also be surprised to know that Albemarle has increased dividends for 28 consecutive years. Although its dividend yield is under 1% and minuscule, its earnings and dividend growth should reap rich returns for investors who scoop up the lithium stock in the heat of a bear market.
