Like most investors, you're probably exhausted by the big drops and the volatility that comes from 10 months of market woes. I know I am. Scanning the headlines, it's tough to find a guiding message you know to be more than just speculation. But I know three immutable facts about bear markets:
- They are hard on investors.
- They do eventually end.
- Long-term investors can benefit from them tremendously.
Not convinced of that last one? Let's talk data. According to investment firm Compound Capital Advisors, the average five-year return after the worst nine-month periods for stocks is 118%. Disciplined investors who continue to buy excellent companies, or just buy the whole market, will more than double their money in five years after a bear market on average. The 10-year returns are higher still.
But wait! Shouldn't we at least try to time the market? Get in at the very bottom? Not according to the data. JPMorgan Chase's wealth management firm points out that missing out on just the best 10 trading days in the last 20 years cut investors' annualized returns by nearly half. And the 10 best days tend to occur less than a month after the worst days. This makes the odds of consistently correctly timing the market incredibly tiny. Famed investor Warren Buffett can't do it -- and he doesn't try.
The good news is that we don't have to time the market bottom. Building a healthy long-term portfolio in a bear market is much easier than in a raging bull market. Many stocks are on sale and likely to outperform for years once the bear goes back into hibernation. It just requires that you know where to look.
Let's take a look at three such candidates.
1. Alphabet stock is on the clearance rack
Alphabet (GOOG 0.74%) (GOOGL 0.55%) can be had today for its lowest price-to-earnings (P/E) ratio in 10 years (as shown below). This includes the March 2020 crash.
GOOG PE Ratio data by YCharts
Yet the business is healthy. Sales reached $138 billion through the first half of this year on 17.5% year-over-year growth while operating income increased by 10% to $39.5 billion. Operating income hasn't increased as much as investors might like. However, the reason might surprise you.
Research and development (R&D) costs have grown $3.8 billion, or 25%, so far this year. R&D has the potential to pay massive dividends down the line, which may make it an excellent investment now.
Conventional wisdom says advertisers scale back budgets during a recession, hurting Alphabet's core Google advertising business. However, when advertisers are competing in a tough market with limited budgets, they will look to get the most bang for their buck. Google Search is practically a necessity for businesses, and YouTube ads are tough to beat.
Plus, Google Cloud is expanding. Revenue exceeded $12 billion in the first half of 2022, growing 39% year over year. This segment faces tough competition in Amazon's (AMZN -1.64%) Amazon Web Services (AWS) and Microsoft's Azure, but the cloud market is vast and growing. Investors are looking for this segment to begin showing profits soon.
The advertising market could get tighter, but Alphabet has the clout to survive now and thrive once the market turns bullish again.
2. Buy AWS and get Amazon for free?
Amazon Web Services is Amazon's cash cow. The segment has a rare combination of tremendous growth and impressive profitability. Sales are up 35% through two quarters this year, putting the segment on pace for $84 billion in revenue for 2022 and likely well over $100 billion in sales next year. The segment has an operating margin of 35% this year.
It's tough to find an exact comparison to this unicorn segment, although I have tried. Microsoft is a profitable software-as-a-service (SaaS) company with a price-to-sales valuation of 9, so let's start there. Using this P/S ratio as a guide, AWS could be valued near $1 trillion based on next year's estimated sales. Since Amazon's total market cap is just $1.17 trillion, the rest of its business sure looks undervalued.
So perhaps we aren't getting the rest for free, but definitely on clearance -- and just in time for the holidays.
Here is what comes with "the rest":
- More than 150 million Amazon Prime members in the U.S. and 200 million worldwide.
- 38% share of the U.S. e-commerce market.
- A burgeoning digital advertising business that generated $7.9 billion in sales last quarter.
Amazon's retail business has suffered from the aftershocks of the pandemic. Logistical headaches, labor costs, and inflation have eaten retail profits, which could continue. Couple this with a looming potential recession, and we can see why the stock is on sale. Long-term investors should keep Amazon stock on their shortlist.
3. CrowdStrike's so confident it's gone on a hiring spree
Many tech companies are talking about (or even instituting) layoffs given the economic climate. But not CrowdStrike (CRWD -0.68%). In fact, CrowdStrike is hiring in record numbers.
"We are also executing our 2023 hiring plan and are pleased to report that we added a record number of net new hires for the second consecutive quarter," CFO Burt Podbere said on CrowdStrike's recent fiscal 2023 second-quarter conference call. "Bringing on and retaining top talent is a cornerstone to supporting our product road map, future growth, and market share gains in new markets."
Companies only hire like this if they are supremely confident in their growth. And growth is CrowdStrike's forte. The company reached $2.1 billion in annual recurring revenue last quarter, an increase of 59%. CrowdStrike's subscription customer base also soared 51% to 19,686 in the quarter. This is quite a leap from the 1,242 customers the company had in 2018.
The growth comes when cybersecurity is top of mind for governments and businesses. Breaches and cybercrime cost billions of dollars, and nations use cyberattacks as warfare tactics. CrowdStrike's modular artificial intelligence-powered approach to stopping breaches is in demand. This means it can thrive even when the economy struggles. Cyberthreats don't take time off, even for recessions.
CrowdStrike stock is more than 40% down from its 52-week high and sits at its lowest P/S ratio ever (excluding the March 2020 crash). The company is firing on all cylinders and looks like an attractive buy for long-term investors with a medium level of risk tolerance.
Building wealth takes time, discipline, patience, and the ability to see past current headlines to capitalize on terrific values. The stocks above are excellent places to begin.
