It’s been a decent year for the investment community. Since reaching its all-time high in the first week of January, the benchmark S&P 500 and followed a lot Dow Jones Industrial Average both have entered the correction area (ie a decrease of at least 10%).
Meanwhile, things are even worse for the growth-dependent Nasdaq composite (^IXIC 3.82%†† After its all-time high in November 2021, the Nasdaq is down 27%. In fact, on May 5, the index had one of its worst single-session performances in history (down 647 points). The fall of the Nasdaq officially puts it in a bear market.
While the speed of moves lower in the broader market can sometimes be unnerving during a bear market, history shows that putting your money to work during these spikes in volatility is a smart move. That’s because any major downturn in the stock market has eventually been wiped out by a bull market rally.
However, this doesn’t mean you have to be a hero and try to catch a falling knife. Instead, buying safe stocks that trade at a discount can be very rewarding during a bear market. What follows are three extremely safe stocks that you will regret not buying on the dip.
The first incredibly safe stock investors to confidently pick up the dip is software giant Microsoft (MSFT) 2.26%††
Given what’s been happening with technology stocks lately, some people may be wary of putting their money to work in Ole Softy. However, this is one of the few companies that is responding well after delivering the quarterly results. Furthermore, the five-year monthly beta of 0.91 means it is 9% less volatile than the benchmark S&P 500.
One of the coolest things about Microsoft that few people are aware of, and what makes it such a safe stock, is its credit quality. Only two publicly traded companies have the coveted AAA rating from Standard & Poor’s (S&P), and Microsoft is one of the two. This is a $104.7 billion cash company ($26.7 billion net cash) that has generated $87.1 billion in operating cash flow over the past 12 months. Even with $78 billion in combined debt and operating lease obligations, S&P is confident that Microsoft will honor its obligations.
From an operational standpoint, Microsoft relies on its legacy segments for top margin and cash flow, while increasingly relying on cloud solutions for its growth.
For example, data from GlobalStats shows that Windows accounted for 73% to 76% of the global operating system market share in the past year (end of April 2022). Even if sales for Windows are flatline, cash flow from this segment can be used to drive higher growth initiatives or facilitate acquisitions.
Meanwhile, cloud solutions are growing like wildfire. Azure is the world’s No. 2 cloud infrastructure solution, based on enterprise spend, with revenue growing 49% on a constant currency basis in Microsoft’s fiscal third quarter (ending March 31, 2022). The beauty of cloud infrastructure is that it is still in the early stages of its growth and producing some very juicy operating margins.
Given that Wall Street expects Microsoft to grow revenue at 15% or more annually, the P/E ratio of 25 for the year ahead is reasonable.
Johnson & Johnson
A second extremely safe stock that investors can buy during the Nasdaq bear market swoon is the healthcare conglomerate Johnson & Johnson (JNJ -0.57%†† Based on a five-year monthly beta of 0.72, J&J is significantly less volatile than the S&P 500.
As noted, only two publicly traded companies have a AAA rating from S&P. Microsoft is one and Johnson & Johnson is the other. To put this in context, the US federal government has been given an AA rating by S&P. This means that the rating agency is more confident that J&J will pay off its outstanding debt than the US government is doing the same. That should help nervous investors sleep better at night.
Another thing to take into account is the defensive nature of the healthcare sector. No matter how high inflation is or how bad the US economy is, people still get sick and need care. This sets a baseline level of demand for prescription drugs, medical devices and health services. It basically means that recessions don’t have much of an effect on J&J’s diverse healthcare business.
Another reason J&J has been such a superstar to investors is the fact that each of its operating segments brings something important to the table. For example, while branded drugs have a limited period of exclusivity, the margins and sales growth potential of prescription drugs generate the majority of J&J’s operating margin. To hedge against exclusivity losses, the company is relying on medical devices, which are perfectly positioned to take advantage of an aging boomer population, and consumer health products, a segment that J&J will soon divest. While the latter is growing slowly, it offers excellent pricing power and predictable cash flow.
Finally, Johnson & Johnson has increased its annual base benefit in each of the past 60 years, and prior to the COVID-19 pandemic, it had increased its annual adjusted earnings for approximately 35 consecutive years.
The third safe stock that investors will regret not buying in the Nasdaq bear market dip is the telecom company AT&T (T 0.61%†† AT&T is the least volatile stock on this list, with a beta of just 0.65.
For years, historically low lending rates and accommodative monetary policy rolled out the red carpet for growth stocks, while sluggish and stable companies like AT&T remained in the dust. But as interest rates begin to climb and valuations come back into the picture, AT&T’s earnings for the year ahead look a multiple of seven and some change looking pretty tempting.
While AT&T isn’t the growth story it was three decades ago, the company still has plenty of opportunities to move the needle over time. Right now, the most obvious catalyst is the 5G revolution.
Upgrading the wireless infrastructure to support 5G speeds will be costly and won’t happen overnight. On the other hand, it’s been about a decade since wireless download speeds were last significantly improved. The ability to accelerate downloads should appeal to consumers and businesses, and is expected to lead to a multi-year device replacement cycle. The key here is that data usage should grow as 5G access spreads — and data can make the biggest margins in AT&T’s wireless segment.
AT&T is also a major beneficiary of the recent spin-off of the content business WarnerMedia, which subsequently merged with Discovery to Warner Bros. Discovery† When the deal closed last month, AT&T received $40.4 billion in cash. Furthermore, well ahead of the deal’s closing, AT&T announced that it would lower its annual payout. Between $40.4 billion in cash and the lower payout, AT&T should have enough capital to deal with the high debt load.
With a low P/E ratio, an inflation-fighting yield of 5.7% and improved financial flexibility, AT&T checks all the right boxes for conservative investors.