3 Stocks Built to Thrive in a Bear Market | The Motley Fool (2024)

Stocks go up and down. It's just the nature of the market. Your ability to look past these up-and-down cycles and focus on buying and holding stocks of great businesses over long periods of time will largely determine how well you do in the market.

At the same time, you probably want to put the money you save to work regardless of whether it's a bull or bear market. Fortunately, there are great stocks to buy when the market is in the bear's grasp, not because they are guaranteed to go up but because they can strengthen their business during a downturn and emerge stronger on the other side.

Let's take a look at some of the qualities that make some companies better built to handle a bear market and why Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.95%), Nucor (NUE -0.02%), and Waste Management (WM -0.33%) are the kinds of businesses you want to buy in a bear market.

How to tackle a bear in two easy steps

Being able to take advantage of a bear market requires the perfect combination of a durable business and a disciplined management team. Joining these two elements can do great things for investors in the good times, but the real value of this combination emerges when the bad times strike. This is when disciplined capital allocators make acquisitions or aggressively invest in the business to grow market share.

To be able to take advantage of these situations, the business must possess certain traits:

• A best-in-class balance sheet. Companies that aren't overburdened with debt (or, even better, are flush with cash) have the financial flexibility to make moves others in the industry cannot.
• Low capital requirements to keep the lights on. A company that doesn't have to consistently plow cash back into the business just to maintain the status quo can free up lots of capital. That cash can then be used on growing the business through the ups and downs of the cycle, which tends to pay off when the market swings back up again.
• A must-have product or service. While demand for products and services will wax and wane with the broader economy, there are some things we need on an everyday basis. Basic consumer products, utilities, and irreplaceable services like taking out the trash don't tend to be as affected by economic cycles.

When you put a business with these traits in the hands of the right management team, it can do great things when the bear market strikes. Each of the companies mentioned above has shown over time that it possesses these traits to one degree or another.

Warren Buffett: Professional bear wrestler

Berkshire Hathaway is the quintessential business that thrives in a bear market. If there is one way to best describe Berkshire's readiness to handle the next bear market, its the company's $100 billion in cash just sitting on the books. Berkshire's various operating businesses in railroads, utilities, and a cornucopia of consumer and business products provides an incredible amount of diversity to handle the ups and downs of various cycles and generate loads of free cash flow.

Of all the investors in the world, there are few better to whom to entrust hundreds of billions in cash than Warren Buffett. Berkshire's performance alone is enough evidence, but if you need further proof of his investment savvy in a bear market, look no further than the Burlington Northern Santa Fe acquisition back in November of 2009. Buying such a large business at a time when the market was in a complete panic certainly belongs on the Mount Rushmore of his greatest investment decisions.

Nucor: Nimble enough to outrun the bears

Steelmaking isn't typically a business that can thrive through the cycles. It's incredibly capital intensive, and most steel furnaces will struggle to be profitable if they aren't running at high utilization rates. Nucor has been able to outperform the industry for years, though, thanks to several innovations that make the company more nimble than its peers.

Instead of employing older blast furnaces that convert raw iron ore into steel, Nucor has built its business using electric arc mini-mills. This method of steelmaking is much more flexible than blast furnaces because the mini-mills can be profitable on a smaller scale, can be activated and shut down relatively quickly, and can use recycled scrap as a feedstock. Also, Nucor's employees have pay packages that are closely tied to the performance of their individual facilities and the overall business, which makes salaries more of a variable cost than a fixed one. The ability to be this flexible has enabled the company to remain profitable over the past several years when so many of its peers were posting heavy losses.

On top of that, management has used times of trouble in American steel to grow the business in various ways. Since 2009, it has spent $8.3 billion on growth and acquisitions to move up the value chain with products such as tubular steel, electrical conduit, and high-strength steel for the automotive industry. It plans to expand on that growth with another $2.2 billion committed to nine new projects. Keep in mind, too, that commodities like steel were in a bear market for most of this decade. It's moves like these that have separated Nucor from the pack.

BRK.B Total Return Price. Data by YCharts.

Waste Management: Bears can't dumpster dive here

Of the three businesses here, Waste Management is far and away the most durable. Our penchant for creating waste knows no economic cycles. Sure, times are betterwhen the economy is booming and the construction industry is creating lots of waste, but rubbish needs to be disposed of at all times, whether it's just everyday refuse or disaster-related disposal.

On top of being in an industry with consistent customers, trash haulers and disposal specialistsbenefit greatly from regulation that makes it incredibly hard for newcomers to enter the field (you try opening a landfill in someone's neighborhood). And the capital intensity of owning a fleet of collection vehicles is prohibitive. With few start-ups nipping at its heels, Waste Management is able to generate consistent profits throughout the cycle and generate lots of cash to reward shareholders.

Waste Management may not be making countercyclical investments like Berkshire or Nucor, but handling trash is already a consolidated industry with a few big-time players. Simply put, the investment opportunities in this industry aren't as great as the others. The business is strong as it stands today, though, so that excess cash can be put toward buying back shares and paying dividends.

Add some bear repellent to your portfolio

Even if buying and holding stocks through bear and bull markets is the best strategy, it's never easy watching your portfolio get eaten alive when a bear market takes hold. There is no guarantee that the stock prices of Berkshire Hathaway, Nucor, or Waste Management will be immune from a price drop. You can mostly sleep well at night, however, knowing that these companies' businesses are relatively safe no matter the market and that their management teams will exploit opportunities to increase shareholder value. If the current drop turns into a full-fledged bear market, investors would be well advised to put their cash piles to work in these stocks.