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The Worst Is Yet to Come

By John Rosevear - Updated Apr 5, 2017 at 7:55PM

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More pain -- and more opportunities -- lie ahead. Will you know where to look?

Great rally we're having, isn't it? In the past month, the S&P 500 has risen from around 750 to right around 900 before falling back slightly. Right now, you've got a nice neat 15% gain. Think we're through the worst of it?

Think again.

My magic crystal ball doesn't work any better than anyone else's, but if I had to guess, I'd say we'll be back down near the lows before winter ends. Consider:

  • Reality -- and more pessimism about the economy -- may set in after the Obama administration takes office and optimism gives way to the sober understanding that the new team's economic solutions will take time to work, and will be expensive.
  • Along the same lines, the recession has hit Wall Street and the upper echelons of corporate America very hard, but the serious pain is just starting to filter down to Main Street. That process will intensify over the next few months.
  • Past bear markets have been marked by sharp rallies off the lows -- followed by sharp declines right back down. The true end of a bear market is typically marked by a point of maximum fear. That's when it seems like everyone's throwing in the towel, and when there's little talk of bargain-hunting.

That last point is the one that's most convincing for me. Do you think we're at the point of maximum fear? If you've been investing for a while, root around in your memory and think back to late 2002. Think of how preposterous it would have seemed to buy Apple (NASDAQ:AAPL) at that point, even though its share price (around $8) was close to the value of the company's cash holdings (around $6 a share).

Many stocks back then were insanely undervalued -- in hindsight. But at the time, nobody had the stomach for technology stocks. The whole sector seemed left for dead. It was awfully hard to visualize a bright future for Apple -- much less one that would include the explosive growth fueled by the iPod, the iPhone and the tremendous Macintosh renaissance of recent years.

That's what a bear-market bottom feels like. I think we haven't seen it yet. I also think that's good news -- if you want to buy the next Apple-at-$8.

It's the little ones that make you rich
The crazy bargains from 2002 aren't the ones I'm thinking about now. Sure, you could do a lot worse than picking up Apple now under $90 -- but Apple's a less speculative investment than it was back in those pre-iPod days. Moreover, it hasn't been beaten up nearly as much, and its growth trajectory is unlikely to be quite as steep as it was in recent years.

What I want right now are the stocks that we'll be citing as examples during the next bear market, seven or 10 years down the road, the ones that will be 20-baggers or 40-baggers, the growth leaders of the coming decade.

Finding them isn't as easy as it looks. You could have bought Akamai (NASDAQ:AKAM) for a buck in late 2002 and seen it ride to more than $50 as its business boomed and cash flow swelled. But you could also could have bought Art Technology Group (NASDAQ:ARTG) for about the same price at the same time. That wouldn't have been awful -- Art Technology was one of the more notorious of the dot-com bubble stocks, but it eventually recovered, became profitable, built a solid book of business, and was up more than $4 until September's market drop lopped off half of its value -- but that's hardly the same as the huge gains you'd have seen with Akamai or Apple.

It's those big ones that we want to find.

Finding tomorrow's Amazon.com right now
We want the great innovators, the coming superstars. We want the Genentech (NYSE:DNA) and Starbucks (NYSE:SBUX) of tomorrow -- and we want them now, before Wall Street catches on. Which now-obscure companies will break the rules of their market segments, change the way business is done, and be the household names of the future?

What company will be held up as the great renewable-energy leader of the next decade? Does First Solar (NASDAQ:FSLR) still have a chance, will the battle go to Suntech Power's (NYSE:STP) low-cost solar cells, or is there another name we should consider? Which small health-care innovator is developing the blockbuster medications and treatments of the 2010s? Who will win the race to provide a new generation of super-efficient batteries?

I don't know, but I do know that Fool co-founder David Gardner and the Rule Breakers team are working overtime looking for exactly those kinds of stocks -- the big names of tomorrow that are still hiding in obscurity today. This bear market represents an incredible opportunity to buy some of their best ideas at what could be once-in-a-lifetime prices. Want to see their best picks for right now? A free trial gets you full access for 30 days -- with absolutely no obligation to subscribe.

Fool contributor John Rosevear owns shares of Apple and Art Technology Group. Starbucks is a Motley Fool Inside Value selection. Suntech Power and Akamai are Motley Fool Rule Breakers recommendations. Starbucks and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$168.49 (-0.44%) $0.75
First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$114.58 (0.06%) $0.07
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
AKAM
$93.68 (-2.41%) $-2.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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