The first thing investors should do when looking for blue-chip stocks to buy for a bear market is to assess whether we’re actually in one.
The official definition of a bear market is a 20% decline from a previous all-time high. On January 4, the S&P 500 hit an all-time high of 4,818.62. As I write this, it is down 17.6% from that high.
According to Ed Yardeni of Yardeni Research, the bottom appears to have been hit in June at 3,666.77, when it was down 24% from its December high. However, Yardeni admits that it’s challenging to pick the bottom with 100% certainty. He does believe there won’t be a hard landing even if the economy is technically already in a recession.
Other analysts believe the index will fall to 3,300 before rallying. If you’re in this camp, I’ve got three blue-chip stocks that win in most economic conditions. These are stocks with strong free cash flow, consistent revenue and earnings growth and low debt levels.
Copart (CPRT)
Copart (NASDAQ:CPRT) is a global leader in online vehicle auctions. It operates more than 200 locations in 11 countries and has auctions for more than 175,000 vehicles daily. The company was founded in 1982. It went public 12 years later, selling 2.3 million shares at $12.
It launched its website in 1996. By 2003, it had completely moved its business model online. It hasn’t looked back. In fiscal year 2003 (ending on July 31 of that year), it had revenues and operating income of $347.4 million and $90.8 million respectively. In fiscal 2021, its revenues and operating income were $2.7 billion and $1.1 billion, respectively.
That’s a 12.1% compound annual growth rate for revenue and a 14.9% CAGR for operating income over the past 18 years. I’ll take this kind of consistent growth every day and twice on Sundays.
Through the first nine months of fiscal 2022, Copart’s revenues grew 34.7% to $2.62 billion, with a 25.8% increase in operating income to $1.05 billion. It finished the third quarter with a trailing 12-month (TTM) free cash flow (FCF) of $760 million and net cash of $1.15 billion.
Down 17% over the past year, they’re cheaper by valuation metrics than they’ve been since 2018.
Adobe (ADBE)
Adobe’s (NASDAQ:ADBE) share price has gotten hit hard since last November when it hit an all-time high of $699.54. Since then, ADBE has lost 42% of its value, although in recent days, like the markets themselves, it appears to have bottomed.
At the beginning of the pandemic, I suggested that ADBE stock was sure to hit $400 in 2020. At the time in early February 2020, Adobe’s share price was around $350. It climbed over $400 in June 2020 and stayed above $400 until earlier this year in May.
Despite its stock getting pummeled, Adobe’s business is doing just fine. In June, it reported Q2 2022 results that included record revenue of $4.39 billion, 15% higher than a year earlier, excluding currency. The quarter finished with Remaining Performance Obligations (RPOs) of $13.82 billion.
Adobe’s evolved into a cloud-based business with excellent gross margins. In Q2 2022, its subscription revenue was $4.07 billion, more 90% of its gross profit. Its operating margin for the quarter was 34.9%, down 180 basis points from a year earlier, but still very healthy.
“Adobe achieved record Q2 revenue with strong demand across Creative Cloud, Document Cloud and Experience Cloud,” Adobe CEO Shantanu Narayen said in its press release. “We are winning in our established businesses and seeing significant momentum in new categories from content authoring for a broad base of creators to PDF functionality on the web to the leading real-time customer data platform for global enterprises.”
Adobe’s TTM FCF at the end of Q2 2022 was $6.86 billion. Under $400, if you’re investing for the next three to five years or longer, Adobe remains an excellent blue-chip stock to buy.
Nvidia (NVDA)
I consider Nvidia (NASDAQ:NVDA) CEO and co-founder Jensen Huang to be one of America’s most influential leaders. He’s taken the company to great heights as a public company and long-time shareholders have gotten very wealthy, including Huang himself, who Bloomberg says is worth $16 billion, making him the No. 103 richest person in the world.
In late June and early July, NVDA stock fell below $150 for the first time since May 2021. That’s despite the company generating a TTM FCF of $7.93 billion on $29.5 billion in revenue, good for an FCF margin of 27%.
You might not think of a chip designer as a traditional blue-chip company, but the reality is that Nvidia has become a force in some of our generation’s biggest global secular trends.
And while analysts continue to lower their target prices for many of the chipmakers — in mid-July, Piper Sandler analyst Harsh Kumar cut his target by $15 for Nvidia to $235 — the future remains bright for the best and the most promising such as Nvidia.
The analyst said that Nvidia’s data center business remains strong despite some of the headwinds it faces from a lack of consumer confidence.
Three months ago, the 44 analysts covering Nvidia had an average buy rating on its stock. That’s since fallen to overweight, with 31 analysts rating it a “buy” to only one “sell.” The average target price of $237.50 provides investors with plenty of upside.
Nvidia currently has $8.6 billion in net cash on its balance sheet. That’s as blue-chip as it gets.
— Will Ashworth
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Source: Investor Place