It’s been a tough year for stocks so far, as the S&P 500 is down over 20% year-to-date (YTD) and is technically in a bear market. This has been mostly driven by the geopolitical issues surrounding the war in Ukraine, increased energy prices, rising inflation, and stress imposed on global supply chains.
Meanwhile, sectors like technology, communications, and consumer cyclical each have dropped over 30% this year; however, the selling has encompassed the broader market, including companies with high-quality balance sheets and enough cash on hand to survive a prolonged downturn.
So how should investors tread this treacherous market? The short and simple answer is to be selective when investing and look for companies in a strong position to weather the storm.
Avoiding a ‘falling knife’
Currently, the market seems to be overselling stocks, and more volatility can be expected going further, with still some unknowns floating around in the broader markets.
Dave Sekera, Chief Market Strategist at Morningstar, recently shared his perspective on the issue of investing during a down market. The strategist advised:
Tip 1 ‘Focus on companies with an economic moat’
“We think markets are waiting to get better clarity on a couple of different factors. The most important right now will be when will inflation start to moderate and when will we see some stabilization in the U.S. economy. So in today’s market, I would focus on the companies that have an economic moat. And we think those will be the companies that have the best ability to weather any kind of economic dislocations that we see as well as those are the companies that exhibit the best pricing power.”
Investing in a company with a solid economic moat, which has seen its stock price reduced, doesn’t guarantee success on its own. There is no guarantee that such a company won’t suffer further losses in a down market, so Sekera advises investors to look at an additional metric.
Tp 2 ‘Focus on companies trading at a significant margin of safety’
“I would recommend for investors to focus on those stocks that do have those wide or narrow economic moats. But those that have sold off and are already trading at a pretty significant margin of safety from their intrinsic valuation. The goal here really is to both minimize the amount of additional future losses but also to be able to provide those investors the confidence that if those stocks do sell off further that they will then go in and actually be able to buy more of those shares, while they’re trading cheaper.”
Which companies to bet on.
In spite of the current economic climate, there are enterprises that can prosper in almost any market. Strong cash flows, solid economic moats, and the right price make these stocks great long-term investments.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
Watch the full interview below: