No-one knows when exactly, but it's a hard certainty that it will come eventually. At some point, we're going to experience a bear market, a peak-to-trough decline in the stock market of at least 20%. It's already been close to three years since the last 10% correction -- a long drought, by historical standards. With that in mind, it's useful to think about which companies are poised to outperform during the next bear market.
Here are a few of our analysts' favorites.
Alex Dumortier: In order to answer the question, I found myself asking a different question: which companies outperformed during the last bear market?
I ran a screen on the current components of the S&P 500 to find those that were in the top 5% in terms of price performance peak-to-trough (Oct. 9, 2007-March 9, 2009). Looking at the resulting list of 24 stocks, three observations jumped out at me:
Three sectors are heavily represented: Consumer Discretionary (8 stocks), Healthcare (7) and Consumer Staples (4).
The three largest auto parts retailers all made the list: Advance Auto Parts (NYSE: AAP), Autozone (NYSE: AZO) and O'Reilly Automotive (NASDAQ: ORLY).
The top-ranking stock, with a gain of 69% versus a decline of 57% for the S&P 500, is also the top-performing stock in the S&P 500 this year: Netflix (NASDAQ: NFLX).
Nevertheless, I'm going to go with another stock on the list. The world's leading travel agency, Priceline (BKNG 1.16%), dominates competitors Expedia and Orbitz (which are expected to merge) with regard to profitability, with an average return on invested capital over the past three years of 28%.
Furthermore, with forecasted long-term growth in earnings-per-share of 18.9% according to Bloomberg (compared to the S&P 500's 10.7%), I think the stock more than deserves its premium multiple of 19.7 times forward earnings.
Brian Stoffel: You might think that because Google (GOOG 0.70%) (GOOGL 0.66%) stock is already up 25% this year you've missed the boat, but you'd be wrong. Whenever the next market bear pops up, Google is poised to outperform. While shares themselves might not boom, I believe that Google is a very safe place for your money.
Even after the recent surge, Google's C shares trade for 24 times trailing non-GAAP earnings. That's above the S&P 500 average, and Google's revenue is growing much faster than the average company's: it clocked in with an 18% improvement during the second quarter at constant currencies.
Just as important, Google is now sitting on over $70 billion in cash that it can deploy if a bear market presents appealing acquisition targets. New CFO Ruth Porat has said the company will be tightening its belt -- which means the cash pile could grow even more in coming quarters.
But most importantly, it is highly unlikely that Google's business would dry up in a bear market. The company is first in the world at providing targeted advertisements to Internet users. Though they might fetch lower prices in a bear market, companies rely heavily on these ads to produce leads, and those advertising dollars are still making the transition to laptop and mobile devices.
Why? First, escapist entertainment is always en vogue. Take a look at the the box office receipts from 2007 to 2009 and you'll see that domestic grosses were up every year. Crashing real estate estate markets and a global recession couldn't keep moviegoers from seeing their favorites.
Look closely, and you'll see that at least one of the biggest winners from that era -- Marvel Studios -- is now a Disney property. The subsidiary kicked off its now-legendary Marvel Cinematic Universe with 2008's Iron Man, earning over $580 million at the global box office.
Plenty more franchises are still to come. New films set in the Star Wars universe, a potential Indiana Jones reboot, a budding Marvel TV universe that stretches from ABC to Netflix, and plenty of animation leave a backlog of potential and near-certain catalysts for a stock that already pays an annual 1.1% dividend yield to those fortunate enough to own shares.
No doubt the bear will bite at some point, but that won't stop the House of Mouse from roaring ahead as it always has.
Bob Ciura: I believe retail giant Wal-Mart Stores (WMT 0.44%) is likely to outperform the broader market when we finally see a meaningful correction. WalMart tends to go against the grain of the economy. When the U.S. economy takes a nose dive, WalMart actually does better than when the economy is improving. For example, in fiscal 2009, WalMart's earnings per share rose 6%, and in fiscal 2008, EPS increased 8%.
Compare this to the most recent fiscal year, when WalMart's earnings per share declined 3% year over year.
The reason for this is that since WalMart is a discount retailer, consumers tend to trade-down their shopping habits when the economy goes south. WalMart's stock price metrics back this up. The stock carries a beta value of 0.75 (beta is an analytical measure that depicts a stock's movement versus the S&P 500 Index). A beta of lower than 1.0 signifies a stock that moves less than 1% for every 1% move in the broader market. And WalMart was one of only two stocks in the Dow Jones Industrial Average that rose in value in 2008. As a result, I would expect to see WalMart outperform if the market falls.