3 of the smartest stocks to buy in a Fed-induced bear market

A little over a year ago, things couldn’t have gone better for Wall Street. Major U.S. indexes were a year away from their pandemic low and had delivered one of the strongest bear market rallies in history. Moreover, there was abundant access to cheap capital and the Federal Reserve was determined to maintain its accommodative monetary stance.

But over the past 12 months, the wheels have fallen off the wagon in dramatic fashion – and the country’s central bank may be to blame.

While no one ever said it would be easy to oversee monetary policy in the world’s largest economy, in hindsight the Fed has left its foot on the accelerator for far too long. A combination of historically low lending rates and ongoing quantitative easing measures designed to depress long-term bond yields played a significant role in sending the US inflation rate to a four-decade high. In fact, a good argument can be made that growth-oriented companies Nasdaq CompoundThe brief dip from bearish territory was mainly Fed driven.

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While sharp market declines can sometimes be frightening — especially when caused by the Fed’s change of course — they are historically the best time to put your money to work. Indeed, all notable declines are eventually erased by a bull market rally.

Below are three of the smartest stocks investors can buy in a Fed-led bear market.

Berkshire Hathaway

Early stock investors would be wise to buy in a Fed-induced bear market is a conglomerate Berkshire Hathaway ( BRK.A 1.78% )( BRK.B 1.90% ).

Berkshire may not be a household name, but its CEO, billionaire Warren Buffett, probably is. Since taking office as the company’s CEO in 1965, Buffett has overseen more than $760 billion in value creation for shareholders (himself included), and he has led Berkshire’s Class A shares ( BRK.A) at an average annual gain of just over 20%. In total, we are talking about an increase of 4,210,069%, as of April 7.

One of Buffett’s not-so-subtle secrets to success is that he filled Berkshire Hathaway’s portfolio with cyclical companies. These are companies that thrive when the economy is in full swing and struggle a bit when recessions hit. Instead of trying to time those inevitable downturns, Buffett has positioned Berkshire Hathaway and its investment portfolio to take advantage of long-winded expansions. After all, economic expansions last much longer than recessions.

Another thing to consider is that a significant percentage of assets owned and invested by Berkshire Hathaway are in the financial sector. The Fed has made it clear that it intends to shrink its balance sheet (i.e. sell Treasuries) and raise interest rates. Higher lending rates will be a boon for bank stocks that have floating rate loans outstanding, and it will also allow insurance companies to generate more interest income on their float (i.e. say their unused premium). In short, Berkshire Hathaway is well positioned to navigate a rising rate environment.

Berkshire Hathaway’s success is also a function of Buffett’s love of dividend-paying stocks. Companies that pay a dividend are often profitable, proven, and have transparent long-term prospects. This year, Berkshire is expected to collect more than $5 billion in dividend income, including north of $4 billion from just half a dozen holdings.

Long story short, riding in the wake of Buffett has long been a lucrative investment strategy.

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CrowdStrike Holdings

Just because the stock market is falling and the Fed is scrambling to control historically high inflation doesn’t mean that growth stocks are off limits to patient investors. A perfect example of a fast-paced business that is a smart buy is cybersecurity stock CrowdStrike Holdings ( CRWD 0.54% ).

Since the pandemic began more than two years ago, companies have accelerated the pace at which they move data online and into the cloud. Since hackers and bots aren’t just going away because Wall Street has had a bad day, the responsibility to protect that data increasingly falls to third-party vendors like CrowdStrike. In other words, cybersecurity has evolved from an optional service to an essential service over the past two decades.

While the cybersecurity industry is expected to be home to a number of winners, CrowdStrike really stands out with its cloud-native Falcon security platform. Falcon monitors approximately 1 trillion events per day and relies on artificial intelligence to become more effective in recognizing and responding to potential end-user threats. CrowdStrike isn’t the cheapest cybersecurity solution, but its 98% raw retention rate suggests it’s one of the best.

Further proof of Falcon’s success can be seen in CrowdStrike’s subscriber numbers and organic growth rate. Over the past five years, the company’s subscriber base has grown an average of 105% per year. Additionally, CrowdStrike has reported 16 consecutive quarters with a dollar retention rate of at least 120%. It’s a fancy way of saying that existing customers have spent at least 20% more year over year for four consecutive years (16 quarters).

As the premier name in cybersecurity, any significant pullback in a Fed-led bear market should be seen as a buying opportunity.

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Walgreens Boot Alliance

A third exceptionally smart stock to buy during a Fed-induced bear market is the drug store chain. Walgreens Boot Alliance (WBA 0.69% ).

In general, healthcare stocks are nearly immune to wild swings in the stock market and, to some extent, the US economy. Because we cannot control when we get sick, there is always a demand for prescription drugs, medical devices and health services.

However, Walgreens proved to be a bit of an exception to this rule during the early stages of the COVID-19 pandemic. Since drugstore chains rely on foot traffic in their stores, the pandemic hurt Walgreens and its peers for a few quarters. With the worst of the pandemic likely in the rearview mirror, Walgreens looks poised to shine no matter what the country’s central bank does on the interest rate front.

What makes Walgreens Boots Alliance such an attractive investment is the company’s multi-pronged strategy to increase margins and organic growth rate. For example, Walgreens cut more than $2 billion in annual operating expenses a full year ahead of schedule. At the same time, it is being spent aggressively on digitization initiatives that will drive direct-to-consumer sales. Although its physical locations will remain its primary source of revenue, the convenience of online sales should have no trouble boosting the company’s organic growth rate.

Speaking of organic growth, Walgreens also partnered and invested in VillageMD. The two have opened more than 100 full-service clinics nationwide, as of February 28, 2022, with the goal of reaching at least 600 clinics in more than 30 U.S. markets by the end of 2025. The key here is that ‘they are full-service, medically staffed clinics, and can therefore handle much more than administering a vaccine. The ability to woo loyal customers and direct those patients to Walgreens’ pharmacy should help improve brand loyalty and business results.

With Walgreens valued at just 9 times Wall Street’s earnings forecast for fiscal 2022 (ending Aug. 31, 2022), now is the perfect time to pounce.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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