3 Bear Market Bargains
The weight of inflation, high energy costs, rising interest rates, and pessimism has dragged prices down to create a bear market. As prices of former high flying stocks creep ever lower, it’s tempting to cut portfolio holdings and run. But some companies stand out with exceptional business models and are trading at attractive valuations.
When news headlines are pervasively negative, it’s hard to remember that bear markets typically last for short durations – significantly so compared to bull markets – and also create opportunities to buy shares at discounted prices. Here are some bear market bargains to consider right now:
Does Alphabet Have 56.9% Upside?
Like many tech-oriented companies, Alphabet’s valuation started to climb shortly after the world realized a pandemic was about to change the way people live and work. From March 20, 2020 to mid-November 2021, shares rose from $1,068 to just under $2,978.
Since its peak in November 2021, Alphabet has largely fallen in lock-step with the major market averages. The fall has been painful for investors who bought late as share prices fell to a low of $2,178 in May.
It’s not entirely a surprise to see Alphabet suffer. After all, most of its revenue still comes from advertising and when the economy shrinks companies trim their advertising budgets so they can concentrate on core activities.
But Alphabet is no longer a one-trick pony. It has a cloud business that ranks in the top 3 with Amazon and Microsoft. In total, the company earned $257.637 billion in 2021, a 41% increase from the previous year. A closer look reveals $148 billion from Google search, $28 billion from YouTube, $19 billion from Cloud and $28 billion from a catch-all bucket called Google Other.
Additionally, Alphabet has $20.945 billion in cash and a massive $67 billion in free cash flow. When the markets recover, expect Alphabet to outperform to the upside. The company is currently trading at a 56.9% discount to fair value of $3,596 per share based on our calculations of future cash flows discounted to present day.
Block Increases Its Moat Daily
Block, the company that owns TIDAL, Square, and Cash App, has had a rough time during the last few quarters. The stock peaked at about $282 in August of 2021. Then a precipitous decline took place all the way to the $70 handle.
Why would you invest in a company that has shown such poor price performance?
Block’s Square products and services target small businesses. Collectively, these SMBs generate a ton of cash, though each individually is a small contributor. By penetrating the market one business at a time, Square has built a moat that is very difficult for competitors to disrupt. Each business onboarded extends the marginal width of the moat.
Over the last few years, Block has expanded its Square services far beyond credit card processing. It offers savings and checking accounts, merchant loans, and loyalty programs tailored specifically for small businesses. Square might not earn as much money as consumers spend less, but it has already established itself as the go-to option for small businesses. When the economy recovers, expect to see Square generate bigger revenues. By 2024, the company at a whole is forecast to post revenues almost 50% higher than those estimated this year.
Cash App also provides a scalable growth lever. Cash App is a financial app that lets users send money to each other, pay for products, buy stock, and even trade some cryptocurrencies. It is attractive to consumers who feel under-served by traditional financial institutions. Expect Cash App to generate higher revenues as more people look for alternatives to brick-and-mortar banks.
Does Dollar Tree Soar When S&P Falls?
Dollar Tree excels during troubled economic times. As an example of its relative outperformance to the market during tough times, look no further than The Great Recession. During a particularly poor period, the S&P 500 lost 25.1% of its value while shares of Dollar Tree grew by 46.9%. You can see a similar trend during the recent contraction. While the S&P 500 lost 12.8%, Dollar Tree shares rose by 17.4%.
Dollar Tree has enjoyed plenty of success during the pandemic. Shares traded for about $70 on April 3, 2020, and gained more than $100 by April 14, when investors had to pay around $173 per share.
Since April, the stock has experienced one major dip, but it recovered quickly. Sitting in the $150s at the time of writing the upside is to around $171 when discounting cash flows to the present day. But this stock has all the potential in the world to overshoot to the upside if a persistent bear market takes hold. At the very least, it’s one to keep on your watchlist.
