The Dow Jones Industrial Average dipped into official bear market territory at the very end of September, falling just over 20% compared to where it started the year, but has since regained significant ground.
Although the bellwether index is still well within the boundaries of a market correction, the potential for another leg down seems high, with Bloomberg Economics saying the likelihood of a recession within the next year is 100%.
Image source: Getty Images.
Both Walmart and Target have "cancelled billions of dollars in orders," real estate brokerage Redfin said 60,000 home sales deals were called off in September, and core consumer prices have surged to their highest level since 1982, suggesting another big interest rate hike from the Federal Reserve is in store.
There is no arguing that bear markets are unsettling, and even veteran investors can be shaken out of their resolve to stay the course. Yet it's also undeniable that history shows such conditions are actually when investors should be buying. Every market correction has been followed by a bull market rally.
That's why the smartest investors use the opportunity to go shopping, and lately they've been buying up some of the most beaten-down stocks. Below are a pair of companies that have fallen by up to 96% that billionaires have still been scooping up.
Carvana
Used car "vending machine" retailer Carvana (CVNA 2.88%) is the most beaten-up of the bunch, with shares down 96% from their recent high. It has struggled through this rough patch for the auto industry as supply chain issues reduced inventories on new cars, which created outsized demand for used ones that ended up causing prices to soar.
That meant people also began holding onto their existing vehicles longer, and Carvana's inventory of vehicles has declined. It ended the second quarter with 2,865 vehicles, down from 3,149 at the end of December. Fewer vehicles means customers have to select cars that are further away from them, resulting in Carvana relying more upon third-party logistics companies to deliver vehicles to buyers.
Carvana has yet to turn a profit, and it's burning through cash. While it has $1 billion in the bank, it's burned through $850 million in the first half of 2022, meaning it needs to shore up its finances quickly.
Wall Street seems hopeful it can turn around its business and not go bankrupt, assigning one-year price targets significantly higher than where it's currently trading. The consensus outlook is for it to hit over $54 a share, four times above where it currently trades. This may be what attracted the Bill & Melinda Gates Foundation Trust, which acquired a position in Carvana of 520,000 shares in the second quarter worth $11.7 million.
It's not the biggest holding in its portfolio (it's actually one of the smallest), but this suggests it also has confidence it's not on the way out and that the used car market will bounce back.
Image source: Rivian.
Rivian
Although the electric vehicle (EV) market has substantial tailwinds behind it for long-term growth, electric truck maker Rivian (RIVN 1.03%) isn't sailing along with it -- and a recall of virtually all 12,000 vehicles didn't help.
Its stock has lost 83% of its value, which seems to have attracted the attention of billionaire hedge fund manager David Einhorn of Greenlight Capital. He bought 73,723 shares at an average price of around $25.75 per share for a total of almost $1.9 million.
That actually goes against the tide of other hedge fund operators, like Daniel Loeb of Third Point Capital, who had been reducing the large stake he acquired last year only to completely close his position in Rivian in the second quarter. Viking Global Capital also exited the stock at the same time.
That might not have been soon enough to help them, though, as the stock had been falling long before then and has mostly been trading sideways lately. It could be that all the bad news has been mostly priced into the stock, which is what Einhorn likes.
Despite the recall -- and most of the vehicles have been fixed at this point -- Rivian has some competitive advantages in its EV, like Tesla, as its electric truck has already been introduced into the market. That helped it secure a large order from Amazon, though some could argue rushing to market is what caused the recall in the first place.
Like Carvana, though, Rivian isn't profitable and likely won't be on a recurring basis for some time. Tesla also took years to reach profitability. But a possible recession could extend Rivian's timeline to achieve it well into the future.
