The current market has now lost faith in itself. We are now very much in a bear market with its own momentum, regardless of the contagion.
The sudden lockdown to flatten the coronavirus infection rate has already had irreversible impacts. Lost jobs, rent and debt defaults, closed businesses.
From most other bear markets the lessons are similar, although they are worth repeating if this is the first time you have encountered a market like this.
Blue chips retain value
Aside from the major miners like BHP Group Ltd (ASX: BHP), most well performing blue chip companies will retain their value. They pulled us from the GFC, and look set to do the same again this time around.
CSL Limited (ASX: CSL), arguably a defensive stock, is actually up 3.48% since the start of the year.
Sonic Healthcare Limited (ASX: SHL) has lost 20% YTD and is still selling at a price-to-earnings multiple of over 18.
Cochlear Limited (ASX: COH) has lost 23% since the start of the year and is still selling at an earnings multiple of 32.
Defensive stocks in a slow down
Defensive stocks have 2 traits that attract investors. They have predictable earnings no matter what is happening in the market, and they hold their value well in the bear markets that follow a crash.
APA Group (ASX: APA) has lost 19% for the year and is still selling at an earnings multiple of 34.
In addition Coles Group Ltd (ASX: COL) is actually up 3% for the year.
AusNet Services Ltd (ASX: AST) has lost only 4% and is selling at a multiple of 24.
Bear market value investing
There are definitely pockets of value in the large caps if you look for them. But the mid caps and small cap stocks are the ones that really take a battering when the markets fall suddenly.
Synlait Milk Limited (ASX: SM1) is a great company. It had a reduced earnings report and has been over-punished by the market sell off, dropping 43% YTD.
Lovisa Holdings Limited (ASX: LOV) is down 72% YTD and has reported solid earnings since listing. Although the company faces some barren months ahead, it has no debt and sells to a low price market.
Gold Road Resources Ltd (ASX: GOR) is a gold explorer in its maiden year of production. It has already rebounded from being 40% down YTD to being only 7% down YTD.
Even bear markets have patterns they follow. There are always ways to make money and always opportunities.
Top shelf blue chips hold their value. If a deepening recession provides an opportunity to buy one of the premium companies then jump at it. Dollar cost averaging is a great strategy now.
Defensive stocks should form a part of every portfolio. They will retain their value once the initial market shocks have passed and the bear market really kicks off.
Lastly, mid caps and small cap companies are where tomorrow’s fortunes are buried during a crash. But proceed with a lot of caution.
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Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and Sonic Healthcare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.