Stocks for bear market

[Valuegrowth]

In my view at some point we may see bear market as well. I can still remember some wanted to sell all types of assets in 2016. However, those who panicked in 2015 and 2016 thinking bull market is over lost some of the biggest gains including multibagger opportunity. It is true that we cannot predict top of the market and bottom of the market. However,there could be individual winners in over extended markets, overlooked,neglected and badly hit areas with promising outlook. I beleive 2018 could be more or less similar to 2017.

As stocks have stretched so much, I found some good English proverbs which talk about taking unnecessary risks. If I am right following proverbs warns against taking risks and suggests that you should keep what you have and not risk losing it by going after more. I really like these proverbs.

A bird in the hand is worth two in the bush
“Better one byrde in hande than ten in the wood." -John Heywood, the 16th century collector of proverbs

What types of stocks or sectors will do well in bear markets? There are some stocks that they could do well in good and bad time.
Is it wise to target only value stocks now? How about value stocks with growth potential?

Any ideas welcome! Thanks.

[Beagle]

I went right down this deep dark rat hole in February 2018 and just about got lost in a sea of negativity.
The conclusion I eventually came too was that yes we are likely to see some PE contraction over the next two years.
How I think this is most likely to play itself out, (you'll appreciate there's a vast range of possibilities) is the market goes ostensibly sideways for a couple of years and as market earnings growth gets absorbed and lower PE's are a net result of a sideways market mixed with 2 years worth of earnings growth.
Its very early days but the conclusion I came too in February has basically played itself out so far.
How to invest in this sort of expected environment was the next conundrum I wrestled with knowing the markets are fairly stretched in terms of fundamental value after a 9 year bull run.

1. Nobody knows the future for certain so I think having a fair bit of cash at present to take advantage of any really surprising opportunities or heavily beaten up stocks makes good common sense.
2. Avoid stocks trading on really expensive multiples with low / modest growth. The theory here is that if and when interest rates increase high PE stocks with low / moderate growth could take quite a hit. I am thinking the likes of for example POT and AIA here.
3. Avoid interest rate sensitive stocks unless you're getting paid a high return now to take on the risk. I only like for example gentailiers and REIT's where you are getting 9% gross as a minimum. I hold modest positions in GNE and ARG that fit my criteria here. The risk with holding lower yielding REIT's and utilities is they take a bigger hit to their SP if interest rates move up.
4. Avoid high growth stocks with no earnings as in a market correction with slower growth people may find it takes a lot longer to achieve forecast sales growth that eventually generates earnings, I'm thinking PPH for example here.
5. Invest in high growth stocks that will continue growing strongly almost regardless of the economic cycle, I am thinking ATM, Synlait, SUM here.
6. Invest in stocks with sound prospects on cheap PE's, I like HLG and when AIR get their engine problems sorted AIR in this space

That's as far as I dared venturing down that deep dark hole without sending myself into a tailspin.

[RupertBear]

I went right down this deep dark rat hole in February 2018 and just about got lost in a sea of negativity.
The conclusion I eventually came too was that yes we are likely to see some PE contraction over the next two years.
How I think this is most likely to play itself out, (you'll appreciate there's a vast range of possibilities) is the market goes ostensibly sideways for a couple of years and as market earnings growth gets absorbed and lower PE's are a net result of a sideways market mixed with 2 years worth of earnings growth.
Its very early days but the conclusion I came too in February has basically played itself out so far.
How to invest in this sort of expected environment was the next conundrum I wrestled with knowing the markets are fairly stretched in terms of fundamental value after a 9 year bull run.

1. Nobody knows the future for certain so I think having a fair bit of cash at present to take advantage of any really surprising opportunities or heavily beaten up stocks makes good common sense.
2. Avoid stocks trading on really expensive multiples with low / modest growth. The theory here is that if and when interest rates increase high PE stocks with low / moderate growth could take quite a hit. I am thinking the likes of for example POT and AIA here.
3. Avoid interest rate sensitive stocks unless you're getting paid a high return now to take on the risk. I only like for example gentailiers and REIT's where you are getting 9% gross as a minimum. I hold modest positions in GNE and ARG that fit my criteria here. The risk with holding lower yielding REIT's and utilities is they take a bigger hit to their SP if interest rates move up.
4. Avoid high growth stocks with no earnings as in a market correction with slower growth people may find it takes a lot longer to achieve forecast sales growth that eventually generates earnings, I'm thinking PPH for example here.
5. Invest in high growth stocks that will continue growing strongly almost regardless of the economic cycle, I am thinking ATM, Synlait, SUM here.
6. Invest in stocks with sound prospects on cheap PE's, I like HLG and when AIR get their engine problems sorted AIR in this space

That's as far as I dared venturing down that deep dark hole without sending myself into a tailspin.

Thanks for sharing your well thought out investment ideas Mr Beagle, and for giving examples of which stocks fit in with your suggested investment criteria, as always very much appreciated

[Valuegrowth]

I went right down this deep dark rat hole in February 2018 and just about got lost in a sea of negativity.
The conclusion I eventually came too was that yes we are likely to see some PE contraction over the next two years.
How I think this is most likely to play itself out, (you'll appreciate there's a vast range of possibilities) is the market goes ostensibly sideways for a couple of years and as market earnings growth gets absorbed and lower PE's are a net result of a sideways market mixed with 2 years worth of earnings growth.
Its very early days but the conclusion I came too in February has basically played itself out so far.
How to invest in this sort of expected environment was the next conundrum I wrestled with knowing the markets are fairly stretched in terms of fundamental value after a 9 year bull run.

1. Nobody knows the future for certain so I think having a fair bit of cash at present to take advantage of any really surprising opportunities or heavily beaten up stocks makes good common sense.
2. Avoid stocks trading on really expensive multiples with low / modest growth. The theory here is that if and when interest rates increase high PE stocks with low / moderate growth could take quite a hit. I am thinking the likes of for example POT and AIA here.
3. Avoid interest rate sensitive stocks unless you're getting paid a high return now to take on the risk. I only like for example gentailiers and REIT's where you are getting 9% gross as a minimum. I hold modest positions in GNE and ARG that fit my criteria here. The risk with holding lower yielding REIT's and utilities is they take a bigger hit to their SP if interest rates move up.
4. Avoid high growth stocks with no earnings as in a market correction with slower growth people may find it takes a lot longer to achieve forecast sales growth that eventually generates earnings, I'm thinking PPH for example here.
5. Invest in high growth stocks that will continue growing strongly almost regardless of the economic cycle, I am thinking ATM, Synlait, SUM here.
6. Invest in stocks with sound prospects on cheap PE's, I like HLG and when AIR get their engine problems sorted AIR in this space

That's as far as I dared venturing down that deep dark hole without sending myself into a tailspin.

Thanks and I really appreciate for the long writing. In short, one has to be with high growth and great value stocks with strong balance sheets. Debt free and cash rich companies also could be another spot. Those who can make use of cash and cash equivalents to increase profit margin through money market operation prudently are the ones to consider most. They are not interest sensitive stocks (companies).

Sectors that historically do well in bear markets

• Food producers
• Basic household products companies
• Telephone companies
• Electric utilities

People will continue to eat, drink, drive cars, take medicines and make phone calls in good time and bad time.

• Identify sectors in which the product or service is a basic necessity rather than a discretionary or luxury item.
• Select the companies in those sectors which have a strong market position and sound financial position.

[Valuegrowth]

After some fire sales there are attractive stocks and bonds available in the global markets for savvy investors who can understand bigger picture and supported by market research.

https://seekingalpha.com/article/418...cted-june-2019

32 'Safer' Dividend Consumer Defensive Top Yield Stocks Projected To June 2019

[traineeinvestor]

Two observations.

The first is that over the longer term, I would hazard a guess that as much if not more money is lost by anticipating bear markets too early and missing out on a lot of growth that precedes the top. That said, this bull market is long in the tooth and valuations in many places look a bit stretched (although better values are showing up in some markets affected by the trade war).

The second is that not all bear markets are the same. In the deflationary bear markets of the 1930s, everything went south and the only safe places were some govt bonds and cash. Gold was confiscated. In the high inflation 1970s, the best places to be were resources and leveraged real estate. Everything else was a long slow train wreck of contracting profit margins and contracting earnings leading to contracting PE multiples. (I am, if course, generalising here.)

Assuming the next bear market will be characterised by trade issues and rising interest rates, I would avoid anything with a highly leveraged balance sheet possibly excepting companies like banks which may benefit from a wider interest rate spread. Even utilities will suffer somewhat in a rising interest rate scenario as interest expense will rise faster than than revenue. I would also avoid most discretionary consumer stocks – there's a reason the car and airline and retail industries are highly cyclical – and stick with household brand staples. I'd look for companies that have the balance sheet capacity to do share buy backs - I'm not sure which companies on NZX are likely to do this.

But before I made any adjustments to the portfolio, I'd make sure my own house was in order - that I can maintain our current lifestyle even if/when companies start cutting dividends. For us that means having 2-3 years of expenses in cash/deposits/short term bonds and that our debt levels can be serviced even if interest rates double.

Highly recommended reading is Russell Napier's "Anatomy of the Bear" - he looks at historical bear markets and provides a lot of useful guidance on how to benefit from them. https://www.amazon.com/Anatomy-Bear-.../dp/1906659354

[Valuegrowth]

Thank you traineeinvestor for the book that you mentioned and the useful information.

[Stranger_Danger]

I could be in the " I would hazard a guess that as much if not more money is lost by anticipating bear markets too early and missing out on a lot of growth that precedes the top." camp as mentioned above, but after a number of sales of long term positions I am currently 67% cash, which I accept is not traditional portfolio allocation!

Not only is the current bull market long in the tooth, it was built on extremely flimsy foundations.

Who remembers the "emergency interest rate" settings that followed the GFC? Did any of you really expect the "emergency" to still be in full effect nearly a decade later?

While higher interest rates are possible, they are far from a certainty, and you don't actually have to forecast higher rates in order to be bearish.

My main reason for extreme caution is that a long period of artificially low rates is likely to lead to extremely poor capital allocation, and the results of this are starting to come in.

In terms of "old economy" companies growing by acquisition, Retail Food Group, Domino's, Greencross (both of them! on either side of the Tasman!), Steel & Tube, Allied Work Force all spring immediately to mind.

Restaurant Brands have done really well and now want to take over the USA. Wtf? Good luck with that. Burger Fuel has poured a fortune into taking over, well, everywhere, and it is hard to see what they have to show for it.

On the tech side you have the Xero and Pushpay stories, but then the Big Un, Getswift, Prospa, Unlockd and many other "next Xero" situations are starting to come out of the woodwork. Overseas - China and USA especially - tech companies of dubious note want to list on the ASX rather than their home market. Why? Lots of suckers, would be my guess.

Crowdfunding and peer to peer lending. The crowdfunding companies are starting to fall over, and if you're wired into what is happening behind the scenes, there are others just holding on. This sector blows up, 100% guaranteed. Peer to peer lending will end up, in hindsight, to be littered with fraudulent borrowers.

Bitcoin and crypto-currency in general. Late last year, 18 year olds were telling me I was retarded and needed to put 100% of my wealth into this sector, like they were. Today, with almost all of it between 75% - 99% down, they are STILL telling me that, seeing an even bigger opportunity to buy the "correction". No fear whatsoever.

Then take a look at anyone under 30 who has bought a house. There is a very high chance they've received parental help, with the rest of it coming from KiwiSaver, which is a mixture of employer money, taxpayer money, and forced saving. Many of these buyers have not saved a SINGLE CENT towards a deposit in the traditional manner, and if you talk to them, there is no fear about the amount of leverage they have taken on, and a sense of entitlement that rates will always be low.

The truth is, since the GFC, a giant experiment in "easy money" has taken place, and by most people's measure, global interest rates bottomed out at 5,000 year lows.

You don't have to be a genius to figure out what this is likely to do to animal spirits, and how skilled the capital allocation is likely to look in hindsight.

I am not sitting in a bunker counting my Krugerrands (my allocation to gold is zero) and I have a very open mind towards taking on risk. However, I'm seeing almost no well priced risk at this stage. Everything is either expensive, or garbage.

[couta1]

I'm pretty much all in, the main indicator I watch is the US 2/10 yield curve, accordingly I see no bear market looming at this point in time.

[Stranger_Danger]

So as to not be too negative, if you put a gun to my head and made me buy stocks today, what I'd look for would roughly be

(a) Virtually no acquisitions over the last five years.
(b) Decent organic and profitable growth over that period.
(c) Almost no "one offs" in the annual results, and no management guidance towards funny rather than actual numbers.
(d) Some gearing is fine, but debt should be relatively modest.
(e) A sector that is not likely to be disrupted in the next decade, or, better yet, an industry participant likely to benefit from disruption.
(f) An experienced manager that has demonstrated skill, especially in the 2007-2012 period. Track record during this time is very important, check it out.
(g) When you look at what the manager says will happen, then you look at what has happened, it is true at least 80% of the time.
(h) Some evidence that the business is run with shareholders in mind. Look at management ownership, especially when they've invested real cash. Deduct points for "heads I win, tails you lose" remuneration structures, especially ones than give away 2-5% of the company each year.
(i) You know a decent number of staff AND customers and their real world dealings with the company are positive.
(j) The shares can be acquired at a decent, or better yet indecent, price. I won't elaborate further because blanket statements don't help in this area. A forward P/E of 45 may be better value than a P/E of 3 depending on the answers of (a) - (i).

As above, and maybe I ask too much, but I'm not finding a lot