This has easily been one of the most difficult years on record for Wall Street and everyday investors. The benchmark S&P 500, which is typically viewed as the best barometer of stock market health, produced its worst first-half return in 52 years. As for the growth-driven Nasdaq Composite, an index largely responsible for pushing the stock market to new highs, it's lost about a third of its value. This puts both the S&P 500 and Nasdaq firmly in a bear market.
There's no denying that bear markets can be unnerving. The speed and unpredictability of downside moves invariably send some investors running for the hills. However, history has shown time and again that stock market corrections and bear markets are the ideal time for patient investors to pounce. Eventually, all notable declines in the major indexes are whisked away by a bull market -- and the current bear market will prove no different.
What follows are 10 top stocks to buy with the major indexes in a bear market.
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1. Berkshire Hathaway
Easily one of the smartest stocks to buy during any significant market downturn is conglomerate Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%). The company run by billionaire Warren Buffett has delivered an average annual return of 20.1% to its Class A shareholders (BRK.A) over the past 57 years.
One of the reasons Berkshire is such a rock-solid investment is because Buffett packed his company's investment portfolio with cyclical stocks. Even though recessions are inevitable, periods of expansion almost always last much longer. This allows cyclical companies to benefit from the natural expansion of the U.S. and global economies.
Additionally, Berkshire Hathaway is a passive-income powerhouse. Over the next 12 months, the Oracle of Omaha's company is on pace to collect more than $6 billion in dividend income, most of which will come from just a few holdings.
2. CrowdStrike Holdings
Arguably the top name to own in end-user cybersecurity solutions, CrowdStrike Holdings (CRWD -0.68%) is another top stock to buy in a bear market.
The Falcon security platform is what makes CrowdStrike so special. Falcon was built in the cloud and relies on artificial intelligence to grow more efficient at recognizing and responding to potential threats. Although it's pricier than most on-premises solutions, CrowdStrike's roughly 98% gross retention rate suggests customers prefer Falcon.
What's even more impressive about CrowdStrike is its organic growth. In roughly a five-year stretch, the percentage of customers that had purchased four or more cloud-module subscriptions rose from less than 10% to more than 70%. This is CrowdStrike's ticket to an adjusted subscription gross margin of 80% (or higher).
3. Enterprise Products Partners
Midstream oil and natural gas stock Enterprise Products Partners (EPD 0.48%), which is doling out an inflation-fighting 8% yield, would also be a smart buy in a bear market.
Unlike upstream drilling companies that ebb and flow with the spot price for crude oil and natural gas, midstream energy companies like Enterprise Products Partners rely on long-term fixed-fee and/or volume-based contracts with drillers. This removes spot-price volatility from the equation and ensures highly predictable cash flow.
Enterprise Products Partners' payout is rock-solid as well. During the height of the pandemic, its distribution coverage ratio -- i.e., the amount of distributable cash flow from operations relative to what was paid to shareholders -- never fell below 1.6. A figure of 1 or lower would signify an unsustainable payout. As for Enterprise, it's boosted its base annual distribution for 24 consecutive years.
4. Bank of America
Normally, investors would be avoiding bank stocks during a bear market. But these aren't normal times, which is what makes Bank of America (BAC -0.13%) a top buy.
Bank of America's secret sauce is its interest rate sensitivity, which is among the highest in the banking industry. With the Federal Reserve aggressively raising interest rates to tackle historically high inflation, BofA is set to enjoy a sizable uptick in net-interest income on its outstanding variable-rate loans without doing any extra work.
Furthermore, Bank of America's digitization initiatives are paying off. The number of active digital users has grown by 6 million to 43 million over the past three years. Also, close to half of all loan sales were completed online or via mobile app in the second quarter. Digital sales are considerably cheaper for BofA than in-person or phone-based interactions.
Image source: Getty Images.
5. Green Thumb Industries
It's easy to be enamored with stalwart businesses during a bear market, but don't forget about lesser-known top players in high-growth industries, such as Green Thumb Industries (GTBIF 2.46%).
Green Thumb is a leading U.S. marijuana stock that's opened 77 dispensaries spanning 15 legalized states. Though it's focusing on a number of high-dollar markets, the strategy to push into limited-license markets like Illinois, Ohio, and Virginia, is smart. With regulators capping license issuance in these states, Green Thumb has a fair chance to build up its brands and garner a loyal following.
But it's the company's revenue mix that really helps it stand out. More than half of all sales come from derivatives, such as edibles, vapes, beverages, and oils. These are higher-priced products with far more attractive margins than dried cannabis flower, and they've helped push Green Thumb to eight consecutive quarterly profits.
6. Mastercard
Another top stock to buy in the current bear market is payment-processing behemoth Mastercard (MA -0.07%).
An oft-overlooked key to Mastercard's success is that its management team has avoided entering the lending arena. Although it would probably have no issue generating interest income as a lender, doing so would also expose the company to loan delinquencies and charge-offs. Since Mastercard doesn't lend, it doesn't have to set aside capital for losses. As a result, it typically bounces back from recessions faster than other financial stocks.
Mastercard's growth runway is also quite extensive. Since most global transactions are still being completed using cash, there's ample opportunity to organically and acquisitively expand into underbanked regions of the world, such as Africa, the Middle East, and Southeastern Asia.
7. Western Digital
For something a bit more off the radar, storage solutions specialist Western Digital (WDC -0.53%) makes for a smart contrarian buy in a bear market.
Despite being a cyclical company, and therefore contending with the likelihood of weaker orders in the short term, Western Digital has been aided by persistent global supply chain problems tied to COVID-19. These challenges have made it impossible for data-storage providers to oversupply the market, which is boosting the pricing and margins for Western Digital's products.
Looking a bit further out, Western Digital should be a prime beneficiary of businesses shifting data online and into the cloud at an accelerated pace. Even though it has a significant presence in data centers with its hard disk drives, Western Digital's NAND flash memory solutions could become a data-center staple by the midpoint of the decade.
8. Amazon
E-commerce stock Amazon (AMZN -1.64%) is a no-brainer top buy during the bear market decline.
While most people are familiar with Amazon because of its leading online marketplace, it's actually the company's ancillary operations that drive its cash flow. I say "cash flow" and not earnings because Amazon's expansion is dependent on reinvesting its operating cash flow back into its business.
Even if Amazon's retail marketplace were to stagnate, solid growth prospects from higher-margin subscription services, advertising services, and cloud infrastructure segment Amazon Web Services (AWS) can send operating cash flow considerably higher. Amazon has well in excess of 200 million Prime members worldwide, and AWS holds close to a third of the global cloud infrastructure market share. These segments could possibly triple Amazon's cash flow by mid-decade.
9. Nio
China-based electric vehicle (EV) manufacturer Nio (NIO 3.49%) is another perfect example of a top stock to buy during the bear market drawdown.
Nio finds itself at the center of an unstoppable transition in the automotive space. With most developed countries aiming to reduce their carbon footprint, EV makers should enjoy decades of above-average growth. Being based in the world's No. 1 auto market (China) is an added bonus for Nio.
What makes this company so intriguing is its innovation. On top of introducing at least one new EV annually, it's Nio's out-of-the-box innovation that astounds. The company's battery-as-a-service subscription lowers the purchase price of its EVs, as well as gives buyers the option to charge, swap, and upgrade their batteries. In return, Nio receives high-margin recurring revenue and locks in the loyalty of its early buyers.
10. Microsoft
Lastly, tech stock Microsoft (MSFT 0.37%) makes for a genius buy in a bear market.
Microsoft's continued success is a function of its legacy segments and high-growth initiatives working hand-in-hand. While its Windows operating system (OS) is no longer the growth driver it once was, it's still the dominant OS in desktops and therefore continues to generate boatloads of cash. Microsoft uses this cash flow to reinvest in various projects and make acquisitions.
Microsoft's top growth channel for the moment is cloud computing. Microsoft Azure is the world's No. 2 cloud infrastructure provider behind AWS. What's particularly impressive is that Azure has been consistently growing faster than AWS of late. If Azure can maintain constant currency growth of close to 50%, Microsoft should have no trouble sustaining double-digit earnings growth and boosting its capital return program.
