As unpleasant as this might be to hear, stock market corrections, crashes, and bear markets are par for the course when putting your money to work on Wall Street. Whereas 2021 saw stocks march higher without much of a correction, all three major U.S. stock indexes plunged into a bear market last year and delivered their worst full-year returns since the financial crisis in 2008.

Although bear markets can be scary and play on investors’ emotions, they’ve historically been the ideal time for investors young and old to pounce. While we’ll never know precisely when a bear market will bottom or how long the decline will last ahead of time, we do know that every bear market throughout history has eventually been fully recouped (and some) by a bull market.

The current bear market can be an especially smart time for retirees to scoop up exceptional businesses at a clear discount. What follows are three ideal stocks retirees can confidently buy during a bear market.

NextEra Energy
The first perfect stock for retirees to buy when a bear market arises is electric utility NextEra Energy (NEE).

It’s no secret that one of the smartest places to put your money to work when volatility and uncertainty pick up is basic necessity stocks. If you own or rent a home, there’s a very high probability you need electricity to power some or all of your appliances. And no matter how well or poorly the U.S. economy and stock market perform, electricity demand doesn’t change much from one year to the next.

To add to this point, most electric utilities operate as monopolies or duopolies in the United States. In other words, homeowners and renters don’t have the ability to “shop around” for the best deal. Based on the existing infrastructure, they often have no choice with regard to which company supplies their electricity. This further solidifies steady operating cash flow for electric utilities like NextEra Energy.

But there’s more to NextEra than just steady electricity demand. Among electric utilities, it’s the global leader in solar (5 gigawatts (GW) in operations) and wind capacity (22 GW in operation). The roughly 30 GW of clean energy currently in operation by NextEra are substantially lowering its electricity generation costs.

As a result of these hefty investments in renewable energy, it’s been able to grow its per-share profits by a compound annual average of 8.3% since 2007. By comparison, low-single-digit earnings growth is the norm for electric utilities.

NextEra isn’t anywhere near finished deploying green-energy solutions, either. It closed out 2022 with a 19 GW backlog of signed wind, solar, and storage contracts, and is expected to sign an aggregate of 32.7 GW to 41.8 GW of clean-energy contracts between 2023 and 2026.

Following a rough start to 2023, shares of NextEra Energy are now trading at 22 times Wall Street’s consensus earnings for next year. That’s the cheapest forward-year earnings multiple for America’s largest utility stock by market cap since 2018. To boot, patient investors will collect a 2.5% yield on a dividend that NextEra’s management team is focused on growing.

Visa
The second stock that would be fitting for retirees during a bear market is payment processor Visa (V).

Visa is a financial stock, and financial stocks are almost always cyclical. This means a U.S. or global recession would likely slow consumer and enterprise spending, which would ultimately be a negative for Visa’s revenue and profitability. But it’s important to note that boom-and-bust cycles can hit cyclical companies very differently.

Historically speaking, recessions don’t last very long — usually between two and 18 months. That compares to periods of economic expansion, which are typically measured in years. Visa benefits from growth in consumer and enterprise spending during these disproportionately long periods of expansion. Put another way, it tends to grow in lockstep with the U.S. and global economy over time.

It certainly doesn’t hurt that Visa finds itself at the top of the pecking order in the U.S., the world’s leading market for consumption. Based on SEC filings from the four major payment processors, Visa accounted for 52.6% of credit card network purchase volume in the U.S. in 2021. It’s the only one of the four major payment processors to meaningfully expand its share of network purchase volume since the financial crisis.

Interestingly, Visa’s recipe for success has been to avoid becoming a lender. While some of its peers choose to double dip and generate interest income as a lender, in addition to collecting fees as a payment processor, doing so exposes lenders to loan losses during inevitable recessions. Since Visa isn’t a lender, it doesn’t have to set capital aside to cover loan losses when economic downturns arise. This subtle but important difference is what gives Visa the financial flexibility to bounce back from recessions so quickly.

Don’t overlook Visa’s growth runway, either. The majority of global transactions are still being conducted with cash, which gives Visa plenty of opportunity to organically or acquisitively enter underbanked emerging markets.

Shares of Visa can currently be purchased for 23 times forward-year earnings. That’s the lowest forward-year multiple for this consistent outperformer since 2016.

AT&T
The third ideal stock for retirees to buy hand over fist during a bear market is telecom stock AT&T (T).

For the past two decades, telecom services have evolved into something of a basic necessity for consumers and businesses: Regardless of economic performance, consumers are largely unwilling to cancel their wireless or internet service, or not have access to a smartphone. For a company like AT&T, it means generally low churn rates in any economic environment.

Although AT&T’s high-growth days are a thing of the past, it still possesses two needle-moving catalysts that are sustaining its inflation-fighting high-yield dividend. The first is its ongoing rollout of 5G wireless infrastructure. After a decade of 4G LTE download speeds, 5G access should entice a continuous device upgrade cycle lasting through at least mid-decade. More importantly, data consumption should markedly increase — and data happens to be where AT&T’s wireless division can generate its best margins.

Maybe the bigger growth catalyst at the moment is AT&T’s broadband segment. AT&T Fiber added more than 1 million customers for a fifth consecutive year in 2022. The company spent a small fortune to acquire 5G mid-band spectrum that it’s now using to offer 5G broadband services, as well as encourage the high-margin bundling of its services.

In addition, AT&T’s spinoff of WarnerMedia last year, and its subsequent merger with Discovery to create Warner Bros. Discovery, has led to a more flexible balance sheet. When the merger of WarnerMedia and Discovery completed last April, it resulted in the new company assuming certain debt lots previously held by AT&T (via WarnerMedia), as well as AT&T receiving cash payments. With a healthier balance sheet, AT&T shouldn’t have any trouble sustaining its 5.9% yield.

Between 2013 and 2016, when AT&T was still benefiting from data consumption growth tied to 4G LTE, it was commonplace for shares to trade at 12 to 14 times forward-year earnings. Today, retirees can scoop up shares of AT&T for less than 8 times forward-year earnings. With modest growth catalysts in place for at least the next three years, AT&T looks like a low-risk, high-reward stock.

— Sean Williams

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Source: The Motley Fool