Just a few weeks ago, it looked like the bull market was here to stay. Now, it's not so clear. Stocks are well down for the month, and the volatility has many investors spooked. Maybe the economy's not on firm enough footing after all.
Investors don't necessarily need to panic, though they can choose to reconfigure their portfolio to a more defensive mix that can thrive on broad malaise or even outright weakness. Here's a closer look at three stocks that can support this strategy with the strong potential to beat a bear market.
British American Tobacco
They're called vices for a reason. People generally know they should give up these bad habits, especially when the money spent supporting them is needed elsewhere. They just can't. Most consumers will continue smoking, drinking, and gambling regardless of the economic environment. That's why stocks of tobacco, alcohol, and casino operators often hold up so well in tough times.
Enter British American Tobacco (BTI -0.51%).
As the name suggests, British American Tobacco is a British company that's parent to strong American cigarette brands like Camel, Lucky Strike, and Pall Mall. It's also plugged into the budding e-cigarette market with its Glo products and the vaping market with Vuse. Traditional cigarettes, however, remain its breadwinner, accounting for more than 80% of last year's revenue.
It's an industry with a limited lifespan. That's because the worldwide smoking cessation effort is working. Not only is the percentage of people regularly using tobacco still falling from its peak back in the 60s, but the total number of worldwide smokers also continues to dwindle from its more recent peak. Fewer people are starting the habit as well.
If you think British American Tobacco faces doom in the near future, though, think again. The World Health Organization estimates the number of worldwide smokers is only apt to fall from 2021's count of around 1.30 billion to 1.27 billion by 2025. At that pace, the business could remain viable and highly profitable, for not just years but decades.
To this end, while the company is clearly fighting a headwind, roughly 40% of its revenue is still consistently turned into an operating profit, and roughly one-fourth of its top line is still being converted into a net profit. That's plenty of money to self-manage and slow the smoking cessation effort and still pay its dividend.
That's a dividend, by the way, currently translating into a yield of 8.6%. That's more than most bonds are paying right now but without a great deal more risk.
Just keep in mind that there will eventually come a time in the distant future when British American Tobacco will start to struggle. You don't want to be around then. It's just a defensive name to think about holding during and because of a potential bear market.
Johnson & Johnson
Healthcare company Johnson & Johnson (JNJ -0.46%) is a similarly defensive play. That is, the world continues buying its healthcare products regardless of the economic backdrop or the stock market's long-term direction.
There's the J&J you're probably familiar with -- this company is well known for its baby shampoos and lotions. Band-Aid bandages, Listerine mouthwash, Benadryl allergy relief, and Tylenol painkiller are just some of the other consumer goods in its family.
Except, these products are no longer actually part of Johnson & Johnson. This business was recently spun off into a separately traded company called Kenvue (KVUE -0.84%), leaving behind J&J's prescription pharmaceutical and medical technology operating units. However, these were always the bigger and more profitable J&J businesses. With Kenvue's consumer-facing business out of the way, Johnson & Johnson can now focus on extracting even more value from these segments.
And their potential is as clear as it is underestimated.
The company's prescription drug portfolio includes psoriatic arthritis treatment Stelara, myeloma therapy Darzalex, and heart-risk preventative Xarelto, all three of which were among the world's 20 best-selling drugs in 2022. Meanwhile, although not generating quite as much revenue, J&J is also the name behind arthritis and Crohn's treatment Remicade, Trevicta (also called Trinza), and cancer-fighting Imbruvica. All told, last year, J&J's prescription drugs turned $52.6 billion worth of revenue into nearly $4.9 billion worth of net income.
Are you surprised to learn that J&J's pharmaceutical business is this big? Lots of people are. More important, though, is that the prescription drug market is resilient in tough economic environments. That's because health insurance companies typically cover the bulk of their cost.
Coca-Cola
Last but not least, add Coca-Cola (KO) to your list of stocks that just might beat a bear market.
The underlying idea is the same here. That is, while consumers might skip a vacation or postpone the purchase of a new car when a lousy economy is driving stocks lower, they tend to keep buying the consumer goods that bring them simple comfort. One example is their favorite soft drinks, of course, but Coca-Cola is more than its namesake soda. The company is the parent to other familiar beverage brands like Gold Peak tea, Dasani water, and Minute Maid juices, to name a few.
And the company is very, very good at doing the branding work that inspires loyalty. Market research outfit Kantar reports that Coca-Cola broke back into its top 10 list of the world's most valuable brands for 2023 due to its "great resilience." In a similar vein, TradingPlatforms reported Coca-Cola was the United States' single strongest brand in 2022 based on consumer perceptions of the brand, as well as loyalty to it.
Clearly, the company's doing something right ... even in challenging economic circumstances.
The other half of the reason to own Coca-Cola shares in bear markets is much simpler and more tangible than somewhat ambiguous brand loyalty. That's the company's dividend. Cash payments become much more compelling when there are few reliable growth options on the table. Not only has Coca-Cola paid a dividend every quarter for several decades now, but it has also raised its payout every year for the past 61 years. You won't find many other companies able to make that claim.
