The Perfect Stock to Buy in a Bear Market

It is official: we are in a bear market.

What should we do now?

Sell stocks? Assume the fetal position and hide under the kitchen table with a death grip on a bottle of cheap tequila? Get a medical cannabis card to ease the pain of losing money? Buy gold and silver? Hide all our cash in a mason jar buried under the shed? Watch the financial and news media to get advice?

Too many people will go down one of more of these paths as the bear market sinks its teeth into their portfolios.

But history suggests that if you are still in the accumulation phase of life, you should probably start buying stocks. Warren Buffett is one of the richest men in the world because he mastered the skill of buying aggressively in bad markets.

I suspect this particular bear is going to hang around for a while. It will take the Federal Reserve some time to wrestle the inflation dragon back into its cage, and rates will go higher and stay there for longer than most traders active today have ever seen.

There will be some of those rip-your-face-off bear market rallies along the way, but in the meanwhile, we should have plenty of time to build significant positions in good companies at great prices.

Keep an eye on two particular groups of people here for ideas about which companies to buy. One is the activist investors that take positions in companies they think are undervalued and then push the management and board to make changes that can push the stock price higher.

The other is insiders. Managers and directors know more about the businesses they run than anyone else—so when several of them are buying stock in their own companies in the open market, it is a bold statement about what they think of the companies’ current valuations.

Following insiders in the 2020 sell-off helped me spot the opportunity in Matador Resources (MTDR) right before the natural gas company went on a run that took shares above $65

I have recently noticed that the officers and directors, including the CEO, have been buying shares of Hanesbrands (HBI), manufacturer of underwear and athletic clothing. The company may see some slowing in sales thanks to a weak economy, but there is little to no chance it will go out of business anytime soon.

If markets get bad enough, the company might even see a sudden increase in demand for one of its product lines!

Hanesbrands includes a fantastic collection of companies with household names. Hanes, for instance, is the leading manufacturer of men’s underwear, with twice the market share of its two closest competitors combined.

The company owns Champion, the company that invented the hoodie 80 years ago and still dominates the market, as well as Playtex, Bali, and Maidenform—three of the most dominant women’s undergarment manufacturers—and Bonds, the dominant men’s underwear company in Australia.

Hanesbrands also owns most of its production and supply chain facilities. In addition, it has local manufacturing in more than three dozen countries worldwide. Almost 80% of the more than two billion pieces of clothing Hanesbrands sells globally each year are produced in company-owned factories.

Seven different insiders have been buying shares in the open market this month.

The stock is trading at less than seven times sales and under $0.50 on the dollar of sales. That’s cheap for a company that is a leader in its industry.

The recent decline has made the shares a high-yielding stock, with a dividend yield of over 7.5%. Moreover, the payout ratio is just 0.47%, so I can see no danger of a dividend cut on the horizon. Hanesbrands has also been buying back stock over the past few years and still has $575 million to buy under the current buyback plan.

It is a bear market. The stock will probably move against you after you buy it.

You can buy in stages if you prefer. Buy a little now and add on every move down.

You may get frustrated because the stock won’t move higher, even though the business is clearly worth more than the current price. But that’s the nature of bear markets. Make this one work for you and not against you and scale into a decent-sized position in this market leader. The bear market will end at some point. When it does, I suspect patient-but-aggressive investors will be able to cash in their Hanesbrands positions for several multiples of the current stock price.

— Tim Melvin

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Source: Investors Alley