The thing about the beginning of a bull market is that it is always obvious in retrospect, but never in real time. Bull markets are born out of bear markets, after all, which are characterized by negative stock returns and plenty of doomsaying on Wall Street. That's hardly an environment that inspires lots of confidence from shareholders.
Yet, optimism can be a valuable asset for investors. Stocks typically rise over the long term and have generally produced some amazing returns in time frames measured in decades rather than months. So, if you think that another bull market is on the way, or has already started, then it pays to have some strong stocks on your watchlist for the rally ahead.
My pick for that situation is Procter & Gamble (PG -0.78%). Here's why.
1. Maintaining market share
P&G's stock has been punished by Wall Street this year due to mostly short-term concerns. Shares are down 5% in 2023, while the S&P 500 has gained 13%. The consumer staples giant sat out of the latest stock rally despite having put up some solid growth metrics. Organic sales were up 7% for the full year following significant gains in 2022.
Sure, most of that growth is coming from price increases, which are set to slow in the coming quarters as inflation stabilizes and consumer spending moderates. These factors have most Wall Street pros forecasting a sluggish 4% sales boost in fiscal 2024. But P&G has a proven track record of holding or extending market share in most of its categories for many years, and its portfolio of leading brands positions it well to lead the industry through the next cyclical rebound.
2. Cash is king
Cash is important during a downturn as it allows you to continue investing in the business at a time when competitors are preoccupied with slashing costs. P&G excels in this arena, routinely converting over 90% of its earnings into free cash flow. Operating cash flow was $17 billion this past year, helping fund $9 billion of dividend payments, $7 billion of stock buybacks, and ample spending in areas like research and development and marketing.
PG Operating Margin (TTM) data by YCharts
P&G's industry-leading profitability also positions it well for the next bull market. With its operating margin of 22% of sales compared to competitor Kimberly-Clark's 14% rate, this business clearly has the resources it needs to maintain its leadership through a wide range of selling conditions.
3. The stock is getting cheaper
You might expect P&G stock to get more expensive when fears are rising about a potential recession on the way. It is firmly entrenched in the consumer staples industry, which is resistant to consumer spending pullbacks. Shoppers don't tend to make dramatic changes to their budgets in areas like home cleaning and baby care, and they often stick with their favorite brands in these niches.
And yet P&G shares are valued at 4.3 times sales today, down from recent highs of closer to 5 times sales. That's pricier than Kimberly-Clark's valuation, of course, but the premium makes sense given the industry leader's better growth and earnings prospects.
There's still no telling when the next bull market will appear. But that's the beauty of investing in flexible businesses like P&G. If consumer spending remains weak for a period and markets decline into 2024, the company can still deliver decent returns and a rising dividend payment. And when the inevitable upturn arrives,
P&G stands ready to capitalize on its dominant market position. Either way, patient investors stand to see strong returns by holding the stock.
