It goes without saying that Warren Buffett has successfully invested through more than a couple of bear markets. As the Oracle of Omaha's investing philosophy emphasizes buying consistently growing businesses at a fair price, it's safe to say he's an expert at picking stocks that flourish while others crumble.
In particular, Buffett owns three stocks that are likely to keep growing during the bear market. They might not be right for people interested in making money on a shorter timeline, but for long-term investors like Buffett, buying shares at today's prices will only further juice the returns.
1. DaVita
DaVita (DVA -0.35%) operates a global network of care and dialysis centers for patients with kidney diseases. Buffett probably likes the stock because dialysis patients need these services regardless of the economy's state, and they need treatment on a regular basis. It's a stable business with little room for earnings surprises and big swings in demand.
Management anticipates that its adjusted earnings per share (EPS) will only grow at a compound annual growth rate (CAGR) of between 8% and 14% per year between 2021 and 2025, but that's just fine. Over the last 10 years, its trailing-12-month net income rose by almost 71%, paving the way for spending hundreds of millions of dollars on stock buybacks in most of the quarters in that period. And, when paired with the fact that the total return of its stock has dropped by around 28.4% over the last year, it'll be getting a discount on repurchasing its own shares for as long as the bear market continues. Buybacks are helpful for investors, as they reduce the number of outstanding shares which makes each of the remaining publicly held shares more valuable. Over time, share repurchases can thus contribute significantly to an investor's returns.
DaVita's valuation is also quite favorable at the moment, with a price-to-earnings (P/E) multiple of 10.3. That's significantly below the market's average P/E of 19.9, which means the stock is unlikely to be vulnerable if investors keep shunning stocks with with bloated valuations.
2. McKesson
As one of the world's most important healthcare distributors, McKesson (MCK -0.06%) is a likely Buffett favorite because of its ability to steadily compound in value without interruption over time. When hospitals need to purchase anything from medications to syringes and diagnostic tests, the business is the supplier of first resort, and its brand is without question the most powerful in the medical supply space.
This company has a massive scale with its trailing-12-month revenue sizing up at nearly $264 billion. What's more, its quarterly revenue is growing like clockwork, rising by 122.2% since Q4 of 2012. And the bear market isn't about to change that, as healthcare systems need key goods to deliver care no matter what, and McKesson has an enormous amount of bargaining power with its suppliers and customers.
McKesson's dividend is small, currently yielding slightly less than 0.6%. Should the bear market depress its stock price, that yield will increase, rewarding shareholders who reinvest their dividends with more shares per distribution. And, like DaVita, it's constantly doing share buybacks, making for a total of $3.8 billion of repurchases in 2021 alone.
Compared to the average P/E ratio of 54 for companies in the medical supply industry, McKesson's P/E is near 45.5. That's not exactly a deep bargain, but it is likely enough that Buffett would consider a fair price. So, if you believe that the biggest healthcare distributor is going to survive and thrive -- and it will -- it might make sense to buy a few shares, even if it might not beat the market every year.
3. Johnson & Johnson
Johnson & Johnson (JNJ 0.05%) is a no-brainer Buffett stock because it's one of the most reliable compounders on the market. For decades, it has developed and sold pharmaceuticals, consumer health products, and even medical devices. And every year for the last 59 years, it hikes its dividend, earning it the elite status of being a Dividend King. Right now, its forward dividend yield is a hair above 2.6%.
The bear market won't change anything about that, nor will economic disruption; though its growth is relatively slow, with quarterly revenue rising only by 3% year over year as of Q2, this isn't the first bear market the company has thrived in. For example, during the bear market starting in October 2007, by October of 2010, the total return of Johnson & Johnson's stock had gained nearly 2.5% against the market's decline of around 20.7%. The total return includes its share price appreciation plus its dividend payments.
Over the last 20 years, the company's sales have risen on an operational basis by 6% per year, and its adjusted EPS has climbed by 8% per year. And while it hasn't outperformed the market in the last decade, its total return of 236.8% isn't far behind the market's increase of 260.7%. For investors who hold it for forever, like Buffett, the endless march of dividend hikes will keep increasing their annual returns, and that's why it might be worth a purchase if it ends up on sale this year.
In terms of its valuation, Johnson & Johnson's P/E of 25 means that it's slightly pricier than the market's average. But, given its propensity for delivering decent all-weather returns over very long periods, it's still a strong value.
