After a dreadful 2022, no one wants to face the possibility of a bear market in 2023. The stock market almost always bounces back from a year of losses with a year of gains -- and usually strong gains.
But it's not inevitable. That last time the S&P 500 posted back-to-back years of losses was in 2000 to 2002, when the market delivered not only two, but three years of losses before posting a 26% gain in 2003.
Investors always admire Warren Buffett's wisdom, but it becomes even more compelling when growth stocks cool off and investors better appreciate value investing. As we get to the end of the year, the S&P 500 remains down 15%. If 2023 does get worse and brings a bear market, consider some of Buffett's picks.
Amazon (AMZN -1.65%), Procter & Gamble (PG -0.03%), and Nu Holdings (NU 0.93%) are three such great stocks to add to your portfolio.
Amazon: Setting the stage for greater growth
Amazon has been one of the best wealth-creating stocks ever, but Warren Buffett only bought shares for Berkshire Hathaway, probably by way of one of his investing managers, in 2019, after much of that wealth was created. That's a big vote of confidence in its remaining potential.
And that potential seems huge. The way Amazon looks now, it's a perfect fit for Buffett's philosophy, which prefers companies that have several revenue streams and loads of cash. Amazon has turned itself into a cash cow, with tons of money coming in from the core e-commerce business, powered by Prime memberships.
It's still investing in improving that business, by experimenting with drones for faster delivery and more efficiency in its distribution networks. But it's also using the money it generates to acquire and develop new businesses -- one area where Amazon shines. It's not afraid to take risks, and its ventures don't always succeed.
But the ones that do can become colossal successes, such as Amazon Web Services. AWS has been a phenomenal and reliable sales generator, but even more, it's a predictable source of profits and has recently accounted for most of the company's operating income.
Amazon stock is down 46% in 2022, which puts it way past bear territory. It's struggling through inflation and the pressured macro environment, and it posted two quarterly losses in the first and second quarters, although it returned to positive income in the third quarter.
But throughout the difficult year, it has continued to acquire other companies, launch new products, and set itself up for continued market dominance. It's an excellent stock to buy when the price is down to bolster a solid portfolio.
P&G: The all-important top dividend stock
Procter & Gamble is a top dividend stock. This entails more than a high yield, but that's the first step. At the current price, its dividend yields 2.4%. Historically, that's been higher, typically above 3%.
That leads to the next step. Procter & Gamble is a rock-solid stock because the company makes essential goods that most households consistently buy, such as Tide laundry detergent and Bounty paper towels. When the market is under pressure and investors look for safe stocks, P&G is a bulwark.
The flip side: It's not a growth stock. But a properly diversified portfolio should have a nice mix of safe stocks, including dividend stocks, to protect it exactly at times like the present.
The third part of Procter & Gamble's attraction as a dividend stock is that it's a Dividend King, having paid and raised its dividend annually for the past 66 years, one of the longest streaks on record. There is almost no other stock as reliable for paying and growing its dividend.
Buffett's relationship with the company is complex. It was one of his biggest holdings until 2016, when he sold most of his stake in exchange for its subsidiary, Duracell batteries. Buffett's remaining position, small as it is, is still a vote of confidence in the stock's fit with his investing model.
If 2023 brings a bear market, Procter & Gamble is an excellent choice for dependable passive income no matter what happens.
Nu: Massive growth with a luxury price tag
Nu Holdings isn't a classic Buffett value stock. It's a growth stock, but it has some characteristics typical of his more standard, value-oriented choices. For example, it's a bank stock, and bank stocks typically generate a lot of cash, a characteristic that Buffett likes in his stock picks.
Nu is a Brazil-based digital bank that's aiming to disrupt the industry by offering customers an improved, tech-based experience. It only went public in 2021 with Buffett's backing in addition to some other big names in venture capital. Buffett owns 2.3% of the company, but it represents a tiny part of his holdings.
Nu is resonating with Brazil's population and continues to add millions of customers every quarter, including 5.1 million in the third quarter. Revenue increased 171% over last year in the quarter, and Nu finally posted a small profit of $7.8 million.
The future looks equally compelling. Nu offers various services, and in addition to bringing in new customers, it has broad potential for up-selling and cross-selling. It's also demonstrating that it can be profitable at scale.
The stock's valuation has come down along with its price recently. The shares have slid 67% over the past year, and the price-to-sales ratio has decreased from near 60, not too long after it went public with Buffett's backing, to less than 8. That might even be cheap enough to buy now considering its incredible prospects.
If there is a bear market in 2023 and the price falls further, it would be an exciting opportunity to get cheap shares before they begin to climb back up.
