The Dow Jones Industrial Average officially entered bear market territory on Monday. That can be scary for investors. But smart investors understand the history of bear markets and that every bear market has had one thing in common. More importantly, they know how to get richer based on that knowledge.
According to Yardeni Research, there have been 22 bear markets since 1928 (measured by the S&P 500 index). Those bear markets have ranged from a 20.6% decline (barely meeting the 20% bear market threshold) to 83% in the depths of the Great Depression in 1930. Each bear market has ended with the same result -- a recovery rally.
Some bear markets have yielded to spectacular bull market runs. For instance, the bear market in 1949 reached its lowest level on June 13 of that year. The ensuing bull market ran for 9,146 days (more than seven years) and gained 267.1% by the time it peaked. When the Great Recession troughed on March 9, 2009, a bull market then produced a 400.5% gain and lasted 1,997 days (nearly five and a half years) until it peaked. Perhaps most astonishingly, the bear market induced by Black Monday reached its nadir on Dec. 4, 1987. After that, it took only 701 days (less than two years) for the market to reach its top, resulting in a 582.1% return.
It's difficult to see your account evaporate from a bear market and have the fortitude to buy more beaten-down shares. Still, smart investors see bear markets as an opportunity to get in ahead of the recovery. One of the smartest investors, Warren Buffett, famously said: "When it's raining gold, don't bring a thimble. Bring a bucket."
In other words, bear markets are a gift that offers investors a chance to buy the stocks of competitively advantaged companies at great prices. Doing so can lead to tremendous long-term results. With that said, here's a look at three beaten-down Dow Jones stocks that could lead the market recovery.
Apple consistently grows in value
Apple's (AAPL -0.92%) iPhone comprises about 50% of the U.S. smartphone market and a healthy share of the global market too. But there is much more to Apple than its wildly popular device.
Image source: Getty Images.
Add-on services are another massive appeal. Through these services, iPhone users can download music from the Apple Music app, store an increasing timeline of selfies on their iCloud storage, and access their credit and debit cards with Apple Pay. After paying a small monthly fee for the services, iPhone users would be reluctant to switch to a competing smartphone if it meant potentially abandoning their photos or reentering all their personal payment info on another device.
Apple still makes most of its revenue and profits from the iPhone, but the more profitable services segment is gaining rapidly. In 2017, when Apple first disclosed the data, services made up only about 14% of Apple's overall revenue and carried a gross margin of 55% compared to 35.7% for iPhones, Macs, and iPads. Through the first nine months of Apple's current fiscal year, the services segment accounted for over 19% of overall revenue, and its gross margin had increased to an astonishing 72.2%.
In dollar terms, Apple's services segment grew its gross profit by 165%, from $17,989 million in 2017 to $47,710 million in 2021. The segment has had a noticeable effect on Apple's overall profitability.
AAPL Gross Profit (TTM) data by YCharts
Apple has plenty of room to grow its services business and continue to expand its profitability. For instance, over the last twelve months, Apple Pay has transacted more payment volume than Mastercard, but 39% of Americans haven't yet heard of it.
Apple's largest shareholder is Warren Buffett's company, Berkshire Hathaway. The company first started accumulating shares in 2016. The shares tumbled during this year's bear market, and Berkshire bought more shares in both the first and second quarters of this year. Apple stock is about the same price as when Buffett bought shares this year. Investors wondering if Apple is still a good value have the stamp of approval from the Oracle of Omaha.
Disney's streaming could be its next growth phase
Disney (DIS -0.31%) brings a powerful brand to the table. Disney princesses, Marvel, Pixar, and Lucas Films attract thousands of guests to its theme parks, the box office, and streaming platform Disney+.
Disney's theme parks and movies are stalwarts, but perhaps its most compelling segment is its streaming platform. In addition to an unbelievable library of content for all ages and demographics on Disney+, the company also boasts ESPN+ for sports fans and Hulu, which features movies, series, and local sports. The streaming platforms have quickly amassed 152.1 million subscribers.
Disney forecasts it will reach between 215 million and 245 million subscribers by 2024. Yet the blue chip, Dow Jones stock has succumbed to the bear market and is down 45% from its 52-week high. Wall Street analysts expect the company to earn $4.03 per share this year, which means the stock is trading at a forward price-to-earnings ratio (based on estimates) of 24.6 times. That's a more attractive valuation than the stock has seen in two years.
Nike is a competitively advantaged blue chip stock
The Nike (NKE 0.25%) swoosh is one of the most recognized brands globally, and it's not by accident. Nike started brand-building when the company signed NBA rookie phenom Michael Jordan to an endorsement deal in 1984. As the popularity of the Hall of Famer snowballed over his career, so did Nike's appeal.
Since then, Nike has repeated the formula over the decades by signing other superstars like LeBron James, Kevin Durant, and soccer superstar Cristiano Ronaldo. Nike amassed industry recognition to a level where competitors like Adidas and Under Armour lack the resources to sign similar high-profile stars.
Image source: Getty Images.
The dollars Nike pays for its suite of superstar athletes affords it the luxury of charging extra for its shoes and athletic gear. That extra pricing power makes Nike more profitable than its competitors in terms of operating margin (revenue minus things like raw materials, advertising, and wages).
NKE Operating Margin (TTM) data by YCharts
Nike's industry-leading operating margin is nearly double its closest competitor and should allow it to sustain its commanding lead in brand awareness as long as sports remain one of the world's most popular events. Yet Nike's market cap has shed $109.36 billion in market value this year. Today's bear market provides investors with a chance to buy this competitively advantaged Dow Jones stock at a depressed price before it recovers.
Buy now or wait?
There is no telling when today's bear market will give way to the bulls. But the stock market is always forward-looking. So, the risk of waiting for good macroeconomic news is missing out on the recovery. Buying stocks of great companies at depressed prices is a recipe for market-beating returns. Even if it means the bear market persists for a while, it's better than suffering from the regret of missing out on these opportunities.
