Defined as the ability to withstand or recover quickly from difficult conditions, resilience is an excellent quality to look for in stocks as we find ourselves in a bear market. By finding durable operators capable of withstanding any market condition, investors can add precious stability to their portfolios in volatile times.
That's what I've been doing, buying CrowdStrike Holdings (CRWD 0.13%), Texas Pacific Land Corporation (TPL 0.51%), and Waste Management (WM 1.08%) recently.
1. CrowdStrike: One cost that businesses shouldn't cut
While cost-cutting is becoming standard for companies in today's turbulent markets, one could argue that increasing cybersecurity spending now could be a great way to lower expenses over the long term.
With the average data breach in the United States now totaling nearly $10 million in direct expenses, cybercrime remains a multitrillion-dollar problem regardless of how the economy performs.
The National Institute of Standards and Technology showed a 170% increase in crucial vulnerabilities compared to last year, spurred by the ongoing digital transformation worldwide.
That's where CrowdStrike and its artificial-intelligence (AI) powered Falcon platform enter the picture.
Buoyed by these frightening statistics, the company's cloud-based endpoint protection and 23 modules are quickly becoming must-haves in today's technology-dense environment.
What sets CrowdStrike apart from its competition are the unique network effects it sees from its proprietary distributed-threat graph. As each new customer joins the company's platform, it generates more signals, allowing its AI model to learn over time, identifying and fighting new threats.
Considering that CrowdStrike counts 69 of the Fortune 100 and 258 of the Fortune 500 as customers, this network effect is already quite robust, helping explain why the stock has beaten the market since it went public.
Perhaps the strongest metric highlighting CrowdStrike's resilience is its dollar-based net retention rate (NRR) of 124%, which has not dropped below 120% since 2018. Dollar-based NRR shows how much more a company's existing customer base spent from one year to the next, including customers lost to churn -- making CrowdStrike's metric a sign of its incredible resilience.
Trading with a price-to-free-cash-flow (FCF) ratio of 65, CrowdStrike stock is far from cheap -- especially considering much of this FCF comes from having stock-based compensation added back into those totals.
CRWD free cash flow. Data by YCharts.
However, with analysts forecasting revenue growth of 54% for the current year and the company dominating one of the most important industries in today's economy, CrowdStrike's resilience might deserve this premium valuation despite the bear market.
2. Texas Pacific: Withstand the bear market with land
Perhaps one of the more peculiar stocks trading on the public market, Texas Pacific Land Corporation offers investors the opportunity to own one of the most historically resilient assets in the world: land. Specifically, the company owns 880,000 acres in and around the Permian Basin.
As the by-product of leftover land from the Texas and Pacific Railway bankruptcy, the company has quietly morphed into a highly profitable business thanks to the royalties it earns from leasing its land to oil producers.
Despite its $15 billion market capitalization, Texas Pacific has only 92 employees, meaning most of these royalties become free cash flow.
TPL revenue (TTM). Data by YCharts. TTM = trailing 12 months.
On top of these incredible FCF margins, Texas Pacific has historically returned almost all of this cash to its shareholders through share repurchases and dividends.
TPL free cash flow. Data by YCharts.
Thanks to these friendly shareholder returns, Texas Pacific has trounced the broader market over the last five years and is poised to continue, with oil prices remaining strong amid a turbulent energy market.
But the company is quickly becoming more than just an "oil stock." Texas Pacific has a bitcoin-mining joint venture set to launch on its property in the fourth quarter of 2022 and has an agreement with Milestone Carbon to determine if carbon sequestration is possible on its acreage.
These new potential revenue streams highlight the unusual optionality at play with an investment in Texas Pacific and its land -- which, paired with the company's strong FCF generation, make it a uniquely resilient investment in today's bear market.
3. Waste Management: As certain as death and taxes
As underwhelming as buying shares of Waste Management might feel for investors looking to beat the market, its recent stock performance might surprise you. Posting total returns of more than 500% in the last decade, the company has quietly become one of the best cash allocators out there.
Waste Management has grown its payments to shareholders by 13% annually over 18 consecutive years of increases, and now has a 1.6% dividend yield paired with a safe 47% payout ratio. On top of this, the company typically buys back about 1% of its shares annually, creating the beautiful "X" pattern seen below -- a great combination in more-mature stocks.
WM shares outstanding. Data by YCharts.
Helping fuel these steady cash returns to shareholders is Waste Management's incredible track record of successfully integrating acquisitions over time. After making 88 acquisitions in just the last five years, the company now accounts for 24% of the U.S. waste and recycling market, locking in its leadership position.
Despite already being the top dog in its industry, management expects to spend an additional $300 million on acquisitions in 2022. These are significant because they help the company streamline its operations and generate increased efficiencies, as demonstrated by the outsize FCF per share it has been generating.
WM revenue (TTM). Data by YCharts.
Trading at 29 times FCF, Waste Management is not cheap, but its track record of serial acquisitions, improving FCF margins, and cash returns to shareholders makes it an excellent investment for withstanding any bear market.
