Bull markets can only last so long, and the current one is getting pretty long in the tooth. By some measures, it is the second longest one since World War II. Regardless of how you calculate it, markets do cycle and bull markets turn into bear markets.
To weather the approaching bear market, three Motley Fool investors turned to a theme: companies that can make a consumer's dollar go further. There's good reason they picked Dollar General (NYSE: DG), Ross Stores (NASDAQ: ROST), and Wal-Mart (NYSE: WMT) as ideal stocks to survive a bear market.
A discount retailer for the next market downturn
Keith Speights (Dollar General): The last time the stock market began to turn bearish, Dollar General's shares were unfazed. That's because the discount retailer wasn't traded publicly yet in 2007. Since its initial public offering in 2009, though, Dollar General stock is up more than 260%. And when the next bear market begins to growl, the stock could be one of the better places for investors to turn.
There are three key premises to my view of Dollar General as a smart bear-market pick. First, I'm assuming that the next sustained market downturn will stem from an economic recession. This isn't a bad assumption, considering that's been true for most of the bear markets over the past seven decades. Second, Americans become more cost-conscious during recessions, which helps discount retailers. Wal-Mart stock, for example, performed pretty well as the last bear market approached.
That leads to my third premise: Lower-valued discount retailer stocks such as Dollar General should be especially attractive as the overall market begins to decline next time around. Dollar General's shares trade at less than 17 times expected earnings, compared to Wal-Mart's forward earnings multiple of 19.
In addition to these three factors, I also like Dollar General because of its focus on building small stores near neighborhoods, often in rural areas. This approach gives it more protection from e-commerce competition than its larger rivals have. Dollar General doesn't get the attention that Wal-Mart does, but it just might be the better bear-market pick.
A retailer that benefits from downturns
Demitri Kalogeropoulos (Ross Stores): No retailer hopes for a recession to hit, but for Ross Stores, an economic downturn can be a good thing. The off-price specialist sources its apparel and home products directly from manufacturers, after all, and so the business benefits from the type of supply and demand imbalances that happen when consumers rapidly shift their spending habits.
That buying strategy helped Ross Stores stroll through the last recession as its comparable-store sales stayed in solidly positive territory. Comps in fact improved to 6% in 2009 from a 2% uptick in the prior year. Most full-price department stores, on the other hand, endured significant sales slumps during that period.
Of course, the company doesn't require a downturn to produce solid sales and profit growth. Comps increased 4% in Ross Stores' most recent quarter to outpace management's target -- and stay ahead of many other national retailers. CEO Barbara Rentler and her executive team also beat their profitability target as operating margin reached 14.9% of sales, or more than double the result from a decade ago. Sure, a recession would probably reverse much of that gain. But it also would leave Ross Stores in a stronger position overall.
The king of the discount retail space
Rich Duprey (Wal-Mart): I'll round out the theme my fellow Foolish investors started by offering up the biggest discount retailer of them all: Wal-Mart.
While the king of retail can shine in rising markets, as Keith Speights notes, it's during bear markets that Wal-Mart's everyday low pricing policy really resonates with consumers. The breadth and depth of selection ensures that consumers can get exactly what they need at a price they can afford. And as it further expands its online offerings, its advantages multiply.
Amazon.com (NASDAQ: AMZN) has spurred Wal-Mart to make the digital channel a primary focus while not forgetting the base from which it came. Total retail sales were 3% higher last quarter as comparable store sales rose almost 2% with traffic 1.3% higher. E-commerce sales surged 60%.
And that's in a generally better economy with more people working and incomes rising. If things turn south in a major way, customers will flock to the retailer they know day in and day out offers the best prices on the greatest number of goods.
Wal-Mart's stock might be trading at record highs, but it goes for just 21 times trailing earnings and 19 times next year's estimates. It also actually trades at only a fraction of its sales and analysts are still projecting this behemoth will be able to grow earnings better than 6% annually for the next five years.
There's a good reason each of us today chose a discount retailer, but as the granddaddy of them all, Wal-Mart is the preeminent company to turn to when times are bad.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Keith Speights has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.