This year has been one of the toughest first half of the year in quiet some time and although we may be nearing the beginning of the end as the curve seems to be flattening especially on inflation, there is probably still a bit more pain to endure before the last reversal puts us on a Bull market path. Bear markets are an investor’s best friend. During major stock-market downtrends, you stand a better chance of building up a big lead over indexed investors. If your goal is to beat the market over the long term, then bear markets play a crucial role. To put it plainly “buy low, sell high” and this bear market is the perfect opportunity to get in at or near the bottom.
Columnist Michael Brush believes it’s a perfect opportunity to buy into Quality Companies. “Portfolio managers have been selling what they can as opposed to what they want to sell, and high quality has more liquidity,” says David Sekera, Morningstar Direct’s U.S. market strategist.
1. Solid cash flow and strong balance sheets
This is key, because it keeps a company from being beholden to banks, bond investors or the stock market to continue funding growth, says Chuck Severson, who manages the Baird Mid Cap Growth Fund BMDIX, +2.37%. Companies with financial strength don’t have to stop doing research and development. They don’t have to stop opening stores. “And they come out stronger because their competitors are facing difficult challenges,” says Severson. “These companies take share in this environment.” Here’s another plus: During recessions, weaker companies trim work forces to maintain margins. So the stronger companies have an opportunity to pick up talent.
2. Businesses with wide moats
Protective moats help companies produce excess returns over the long term. Warren Buffett is a big fan of moats, which probably helps explain his success. These protective barriers are also a core part of the investment analysis at Morningstar. Moats are created by strengths, such as powerful brands, proprietary technology, scale advantages from sheer size or network effects (more users make a service more valuable). Companies with moats “generate excess returns over the long term and they have the best ability to withstand economic disruptions,” says Sekera, the U.S. strategist at Morningstar. In the current selloff, you can find an unusua
3. Pricing power
Pershing Square’s Bill Ackman says pricing power is a key characteristic that defines “quality” at companies. After all, if a company can raise prices without losing business, it’s a sign that customers really like what it does. That seems to be the case with Chipotle Mexican Grill Inc. CMG, 3.95%, Ackman’s second-largest position at Pershing Square (at 17% of the portfolio).
Chipotle raised prices by 4% in the first quarter. That helped power respectable 16% revenue growth to $2 billion, and an earnings beat. Despite the price hikes, comparable-restaurant sales went up 9%, which tells us customers were not fazed by the increases. (The rest came from new restaurant openings.) Higher prices helped operating margins rise slightly to 9.4% from 9.3%.
Howard Kornstein, a professional trader with more than 40 years’ experience in stocks, options and futures, developed and fine-tuned his strategies while facing every imaginable market environment. He has little patience for those who claim they can’t make money trading, even during the current bear market. “This bear market is mild,” Kornstein says. “I see buying opportunities. Many people took money out of the market a few weeks ago as the market went down. Guess what? The market will go back up again, just like it always does.”