The Nasdaq and other major exchanges are flirting with bear territory, which has investors worried that stocks could have further to fall in the year ahead. Seven leading Wall Street strategists have already lowered their year-end predictions for the S&P 500, according to Bloomberg. On top of that, market experts predict that corporate profits will remain under pressure throughout the first half of 2016. Yet as stocks become cheaper, it creates an opportunity for investors who know where to look for quality names.
It's in this spirit that three Motley Fool contributors explain why they see Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), PepsiCo (NASDAQ:PEP), and General Mills (NYSE:GIS) as stocks that should reward investors in the bear market ahead.
Joe Tenebruso (Berkshire Hathaway): Some companies are capable of navigating the treacherous seas of bear markets better than others. But few businesses directly benefit from market downturns as much as Berkshire Hathaway.
Not only does Berkshire's stock tend to outperform when the market falls, but it's during these times that CEO and legendary investor Warren Buffett is best able to deploy the company's massive cash hoard. Even after accounting for the approximately $23 billion the company has allocated to its recently completed acquisition of aerospace parts supplier Precision Castparts (UNKNOWN:PCP.DL), Berkshire should still have about $40 billion in cash reserves. Buffett likes to keep $20 billion on hand in case the company's insurance operations need to pay large claims, which leaves about $20 billion that Buffett could allocate toward value-creating acquisitions.With the market -- as measured by the S&P 500 -- down about 8% since the start of the year, many quality businesses are currently trading at attractive prices. Buffett is no doubt on the prowl for bargains to add to Berkshire's stable. And with Berkshire itself trading near multi-year lows in terms of price-to-earnings and price-to-book -- and close to the 1.2 times book value at which Buffett has said he would consider buying back Berkshire stock -- it may in fact be the company's own shares that represent the best value of all.
Tamara Walsh (PepsiCo): If the markets get worse before they get better, as many believe, plenty of companies will be forced to cut dividends. However, thanks to its cash-rich balance sheet, PepsiCo shareholders need not worry about such a fate. Pepsi is a best-of-breed stock that has proven it can withstand the test of time, despite volatile markets.
The soda and snack giant increased its dividend for the 42nd consecutive year in fiscal 2014, and rewarded shareholders to the tune of $8.7 billion through share repurchases and dividends. For those keeping score, that meant a 36% increase in shareholder returns over the prior year. Pepsi has paid a dividend every year since 1965, weathering some serious storms and economic downturns in the process. Bear market or not, investors can therefore rest easy knowing that PepsiCo won't sacrifice shareholder returns for near-term performance.
The stock now pays an annual dividend of $2.81, which gives it a yield of 2.88%. That's better than the average yield among dividend stocks generally of just 2% today . Pepsi should have no trouble continuing to grow its dividend, despite market turbulence, thanks to its strong portfolio, which includes 22 brands that individually generate more than $1 billion in sales annually for the company. Additionally, PepsiCo is on track to deliver as much as $1 billion in productivity savings in fiscal 2015. Together, these factors make it a reliable stock to own in an otherwise choppy market.
Keith Noonan (General Mills): If you're looking for stocks to buy during an economic downturn, companies that have strong brands and pay reliable dividends are a good place to start. General Mills certainly satisfies the dividend component -- with a roughly 3.2% dividend yield and a 12-year history of payout increases.
On the brand front, the company offers a diverse lineup of packaged food products, some of the most notable being Cheerios, Colombo Yogurt, and Progresso soups, but stagnant sales and declines for it core products have led to questions about just how strong its product lineup is in the current environment. The good news for General Mills, and potential investors, is that the company is relatively well-positioned to weather an economic downturn. In fact, General Mills could be one of few large-cap companies to see sales increases amid worsening economic conditions.
One of the big challenges facing General Mills is that consumer preferences are shifting toward organic and non-GMO foods, and it hasn't yet built a strong position in those areas. But this trend could subside or reverse if people have less disposable income, and premium, health-oriented products are set aside in favor of less-expensive alternatives. If lapsed consumers head back to products like boxed cereals, it would remove some of the pressure on General Mills to acquire emerging competitors, and give it some extra time to build up its own health-oriented brands. A decrease in spending at restaurants and an increase in online food ordering could also work in the company's favor.
With an attractive dividend, a lineup of established brands, and the potential to benefit from downturn-induced changes in consumer spending, General Mills looks like it could be a top stock in bear market conditions.
Joe Tenebruso has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. Tamara Walsh owns shares of PepsiCo. The Motley Fool owns shares of and recommends Berkshire Hathaway and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.