3 No-Brainer Buffett Stocks to Buy if 2022 Brings a Bear Market

[The Motley Fool]

These stocks will reward you over time and tide you over in a bear market.

Key Points

• Amazon has prioritized serving its customers under any circumstances.
• An S&P 500 index fund is a secure investment in the market.
• Store Capital is a high-yielding REIT with massive opportunities.

As we near the end of the first month of a new year, the stock market is experiencing a lot of turmoil. 2021 was a huge recovery year after the 2020 crash, and the market ended on a high, with the S&P 500 up 26.9%. Those gains have not been repeated — so far — in 2022, and the S&P 500 is down about 7% as of midday on Jan. 26.

There are a number of reasons for investors to worry. High on the list is the omicron coronavirus variant, which is still wending its way through the world and shutting down many parts of the economy. Another factor is premium valuations on growth stocks, whose prices are falling more in line with their real growth prospects. Their prices are also falling on concerns about the Federal Reserve raising interest rates this year to combat inflation. Higher rates affect growth-focused companies’ ability to raise cheap capital to fund their expansion.

Investing legend Warren Buffett is known for his value investing style, which looks for stocks that are undervalued relative to their real worth. This strategy could be a winner for investors in what might end up being a bear market.

Three stocks that Buffett’s holding company, Berkshire Hathaway, has holdings in that might serve an investor well in a bear market are Amazon (NASDAQ:AMZN), the Vanguard S&P 500 ETF (NYSEMKT:VOO), and STORE Capital (NYSE:STOR). Let’s find out a bit more about these investment options.

1. Amazon: An unparalleled e-commerce company

E-commerce giant Amazon became a go-to shopping spot for millions of people around the globe as the pandemic got underway. The pandemic continues and so does Amazon’s popularity, although growth is slowing down as its latest results get compared to 2020’s stellar comps and supply chain issues continue to affect bottom lines.

A bear market has multiple definitions, but it’s generally defined as a decline of at least 20% in the S&P 500 from recent highs. When the broader market tanks, you want to keep your most basic investing principles in mind, such as focusing on the long term and holding high-quality companies. That’s where Amazon comes in. Amazon is a heavyweight that will continue to grow for many years in various economic environments, and it’s a company that investors don’t have to worry about going under.

Amazon’s sales increased 15% year over year in the third quarter, and management is forecasting growth of between 4% and 12% in the fourth quarter. Profitability was pressured as the company focused on long-term priorities, which for now means delivering an exceptional customer experience even though it means higher shipping costs, increased wages, and other moves that are straining the bottom line. Its cloud component, Amazon Web Services, is still posting phenomenal growth, accelerating to a 39% sales increase year over year in the third quarter, and it remains profitable.

CEO Andy Jassy said, “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.” That commitment is what keeps customers loyal and generates more business.

If you’re worried about a bear market, you can be more confident holding on to Amazon stock, which trades at 56 times trailing-12-month earnings (a bargain based on Amazon’s average performance over the past decade).

2. Vanguard S&P 500 ETF: Don’t try to beat the market, match it

It’s not easy to beat the market. Over the past five years, roughly 73% of mutual funds have underperformed the returns of the S&P 500. For a lot of people, simply placing their money into a passive fund like the Vanguard S&P 500 ETF (exchange-traded fund) which mirrors the benchmark index will get them the highest return.

This Vanguard ETF is up 17% annualized over the past five years (well above the S&P 500’s lifetime average return of 10.5%). That’s an attractive rate, and it comes with less risk and fewer headaches than aiming to time or beat the market by picking individual stocks that ping pong back and forth. Buffett often recommends investing in the S&P 500.

Granted, if we enter a bear market, it means this ETF will be down. But it’s a relatively safe place to keep your money as the index invariably returns to a growth trajectory and recovers its losses over time.

3. STORE Capital: For those focused on dividends

One strategy to maintain market gains in a bear market is to invest in dividend-yielding stocks. While some companies did suspend dividends during the pandemic, many dividend stocks were in strong enough financial shape to at least maintain their payout levels. In particular, investing in a strong real estate investment trust (REIT) can yield high dividends for shareholders, since the tax structure of these companies requires them to pay out 90% of their net income as dividends.

STORE Capital owns nearly 2,800 properties that it leases to single-tenant businesses, mostly restaurants and other service-based organizations. It operates a triple net lease arrangement, which means the tenant is responsible for most of the property maintenance. It’s a fairly low-risk business model where STORE buys properties from companies that own their own stores, providing those companies with capital they might need for investment or debt reduction. These companies tend to sign long-term leases for the assets they just sold. As a result, STORE’s average lease length is roughly 13.5 years. That’s long enough to get the REIT through the ups and downs of a cyclical economy. That’s a clear benefit to the landlord, but it tends to benefit the tenant as well. STORE management sees a huge market opportunity of 2 million properties and $3.9 trillion in market value.

The dividend generates a yield of 5% at the current stock price, and STORE has raised its dividend annually since it went public in 2014. Buffett bought a stake in STORE Capital in 2017 worth 9.8% of shares outstanding. You might want to consider adding shares to your portfolio as well, especially if we hit a bear market.

By Jennifer Saibil