Cash flow provides safety in a bear market.
The unpredictability of the inflationary environment has generated extreme market volatility, and the S&P 500 index officially dipped into bear market territory earlier this month. Even Wall Street analysts aren’t quite sure the U.S. economy can avoid a recession. With so much uncertainty in the market, investors can find safety in dependable, reliable stocks. Morningstar maintains a cash-cow list of stocks with positive free cash flow growth over the past five years and cash balances of at least 5% of total assets. Here are eight stocks to buy in a bear market that are flush with cash, according to Morningstar.
Google and YouTube parent company Alphabet’s online advertising and search businesses make the company one of the most consistently profitable stocks in the market. In the first quarter, Alphabet generated $16.4 billion in net profit and reported 22.9% revenue growth. Analyst Ali Mogharabi says YouTube’s recent weakness is only temporary, and Alphabet is generating impressive growth in its search advertising and cloud services businesses. Ad revenue growth has slowed, but Mogharabi says Alphabet’s recently announced $70 billion buyback authorization will help support the stock. Morningstar has a “buy” rating and $3,600 fair value estimate for GOOGL stock, which closed at $2,370.76 on June 24.
Meta Platforms Inc. (META)
Meta Platforms is a social media leader and the parent company of platforms such as Facebook and Instagram. Meta shares are down nearly 50% year to date in 2022 as user growth has slowed and heavy investments in the metaverse have weighed on profitability. Fortunately, even in a difficult environment, Meta reported 6.6% revenue growth and $7.4 billion in net income in the first quarter. Mogharabi says the recent resignation of longtime chief operating officer Sheryl Sandberg underscores CEO Mark Zuckerberg’s focus on Meta’s metaverse platform, Horizon. Morningstar has a “buy” rating and $384 fair value estimate for META stock, which closed at $170.16 on June 24.
Visa Inc. (V)
Visa operates the world’s largest retail electronic payment network and is a leading credit card and digital payments brand. Visa is highly exposed to credit, debit and mobile payments. In the fiscal second quarter, Visa reported 25.4% revenue growth and $3.6 billion in net income. Analyst Brett Horn says Visa is an established market leader with significant long-term growth prospects. Horn says there is still a long way to go in the global transition from cash payments to digital payments, particularly in undeveloped global markets. Morningstar has a “buy” rating and $229 fair value estimate for V stock, which closed at $205.51 on June 24.
Nvidia Corp. (NVDA)
Nvidia is a semiconductor stock that produces high-end graphics processors for personal computers, smartphones and other applications. Amid a global semiconductor shortage caused by supply chain disruptions, Nvidia reported 46.4% revenue growth and $2.2 billion in net income in the first quarter. Analyst Abhinav Davuluri says Nvidia’s gaming and data center segments are its primary growth drivers, but gaming demand will likely slow in the second quarter due to weakness in Europe and China. Davuluri says Nvidia is his top stock pick among fabless semiconductor companies, which design chips but don’t fabricate them. Morningstar has a “buy” rating and $200 fair value estimate for NVDA stock, which closed at $171.26 on June 24.
Mastercard Inc. (MA)
Mastercard is another leading global credit card and digital payments network. Mastercard isn’t quite as large as Visa, but shares are up 155% in the past five years, compared with a 115% gain for Visa. In the first quarter, Mastercard reported 24.3% revenue growth and $2.6 billion in net income. Horn says Mastercard has established a defensible position in the payments market, and the ongoing global shift to digital payments creates opportunities for Mastercard to continue to generate value over the long term. Morningstar has a “buy” rating and $369 price target for MA stock, which closed at $330.50 on June 24.
Broadcom Inc. (AVGO)
Broadcom is a diversified semiconductor producer. In the first quarter, the company reported 22.5% revenue growth and $2.5 billion in net income. In May, Broadcom took advantage of its strong balance sheet by announcing a $61 billion buyout of VMware Inc. (VMW). Davuluri says Broadcom timed the VMware buyout well given the recent weakness in tech sector stocks and temporary growth headwinds generated by VMware’s transition from a license-based model to a subscription model. Davuluri says VMware will be a significant growth driver for Broadcom. Morningstar has a “buy” rating and $624 fair value estimate for AVGO stock, which closed at $509.09 on June 24.
Salesforce Inc. (CRM)
Salesforce is the largest provider of customer relationship management, or CRM, software and cloud computing services. Analyst Dan Romanoff says Salesforce is one of the best long-term investment opportunities in the software space. While annual revenue growth is likely to drop below 20% at some point in the next several years, Romanoff says margin expansion should help the company keep its compound annual earnings growth above 20% for much longer. Romanoff says the company will continue to benefit from cross-selling and upselling to its existing customers. Morningstar has a “buy” rating and $305 price target for CRM stock, which closed at $185.92 on June 24.
Advanced Micro Devices Inc. (AMD)
Advanced Micro Devices is a leading semiconductor producer that supplies PC microprocessors and graphics processors. At its recent analyst day event, AMD guided for 20% long-term compound annual revenue growth. Davuluri says AMD’s execution on its product roadmap has been extremely impressive in recent years, especially its EPYC server central processing unit family. Davuluri says AMD’s EPYC server chips continue to gain share from market leader Intel Corp. (INTC), and AMD’s expected late-2022 rollout of its 5-nanometer-based Genoa server CPU will apply further pressure to competitors. Morningstar has a “buy” rating and $130 fair value estimate for AMD stock, which closed at $87.08 on June 24.
8 stocks to buy in a bear market:
— Alphabet Inc. (GOOG, GOOGL)
— Meta Platforms Inc. (META)
— Visa Inc. (V)
— Nvidia Corp. (NVDA)
— Mastercard Inc. (MA)
— Broadcom Inc. (AVGO)
— Salesforce Inc. (CRM)
— Advanced Micro Devices Inc. (AMD)
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