A bear market happens when prices drop by at least 20%, creating a chance to buy shares at discounted prices. It’s the classic “buy low and sell high” approach to making money from the stock market. But some stocks are broken. Share prices of high flying companies that subsequently got crushed 80-90% may never recover to former highs. Still other companies were beaten down but have strong fundamentals. Which is which? How do you know what to buy and what to sell?
Three ways to pick winners include:
- Buy shares in companies with strong fundamentals that have sold off in price
- Buy shares in companies that are rapidly growing in spite of economic headwinds
- Buy stocks that are breaking out even though the broader economic news is negative
Here are some stocks with bright prospects:
Microsoft: A Relatively Low-Risk Option
Microsoft has a long history of success. Until recently, the company’s stock price has been flat or moving upward since 2002 (with slight fluctuations along the way, of course). That’s two decades of steady performance from a company that dominates much of the tech industry.
One year ago, Microsoft shares traded for about $335, bringing it very close to a record high. As Q3 began, you could buy shares for approximately 25% cheaper.
The share price decline doesn’t mean Microsoft is a bad bet with financial problems, though. It’s an industry leader that owns Windows, Xbox, Office, Microsoft 365, and an endless list of devices and apps. Microsoft has a product for you whether you want to make business decisions based on big data analytics or you want to relax while playing a video game.
Looking at the company through the lens of value, it has upside to $324.17, representing 28% upside based on a calculation of cash flows forecast to the future and discounted to present day.
PubMatic: More Risk With the Opportunity for Rapid Growth
Microsoft is a fairly safe bet that will add stability to your portfolio but what if you want more bang for your buck? What if you want to use the bear market to buy a stock that has really taken a tumble but has a lot of potential?
In that case, you might want to explore a company like PubMatic, which uses big data and analytics to target consumers with influential advertisements. The company hasn’t been around for very long (it went public in late 2020), so it doesn’t have much history. It has produced some impressive results, though.
The company reports that its Q1 2022 revenues ($54.6 million) were up 25% year-over-year. Just as importantly, PubMatic has proven that it can reach consumers. In Q1 2022, it processed nearly 32.6 trillion impressions, 76% more than in Q1 2021.
Additionally, it doesn’t cost much money to invest in PubMatic. At the time of this writing, you could buy a share for under $20. That’s about half of the price from one year ago. In other words, the company is making more money and reaching more people, but its stock price has half the value as before.
Better yet, the company’s intrinsic value is $24.52 by our estimates, representing 59.8% upside at the time of research.
Shift Your Perspective on the Bear Market
Some investors respond to bear markets by selling off shares and holding on to cash. This is a particularly dangerous time to follow that strategy. With an inflation rate over 8.5%, holding cash isn’t a great idea. You can put it in a savings account, but it will earn a tiny interest rate that doesn’t come close to countering the negative effects of inflation. Series I Bonds are attractive, paying almost 10% but the maximum any individual can contribute is $10,000 in a year.
Buying shares now gives you an opportunity to invest in companies “on sale”. It doesn’t ensure that your investment options will lead to growth, but it does position you for longer term success.
If you’re concerned about exposing your portfolio to too much risk, take a balanced approach that includes safer bets like Microsoft and Alphabet and slightly riskier bets like PubMatic, Sea Limited, and Nvidia.
Other strategies to implement include:
- Dollar-cost averaging that involves investing a set amount of money each week or month.
- Buying dividend stocks and reinvesting your payouts to buy more shares.
- Holding shares and waiting for the market to recover.
Again, there are no guarantees. Still, the bear market creates opportunities for low-cost investing and substantial growth. If you have disposable income during this downturn, it could make a lot of sense to allocate some of it to stocks.