Lending markets

Bear markets and recessions are no match for these top 3 stocks

The S&P500 The index was pushed into bearish territory and is now trading down about 21% year-to-date. Unfortunately, it’s not just about shaking investor confidence. The real economy has also weakened.

US gross domestic product (GDP) unexpectedly fell 1.6% in the first quarter of this year, and recently released data modeling from the Atlanta Federal Reserve estimates that the country’s GDP contracted by 1% in the recently completed second quarter. If so, it means that the economy will have recorded two consecutive quarters of decline and will likely have entered a recession.

As such, the stock market may continue to struggle in the near term. However, a panel of Fool.com contributors has identified three investment candidates who are positioned to thrive in tough conditions. Read on to find out why they think these stocks will bring gains to your portfolio.

Enter the area

James Brumley (Auto Area): While it is true that prolonged weakness upsets most stocks, there are a few exceptions. One such probable exception is Auto area (AZO 0.50%). Yes, I’m talking about the chain of auto parts and auto care stores.

It seems strange at first. Generally speaking, retailers struggle when investors feel a financial pinch, and people may put off installing new tires on their car if their current tires look “good enough.” However, because repair and replacement parts are such a big part of the business – and repairs are rarely optional – the auto parts business is surprisingly resilient. This company rode through the fallout of the 2008 subprime mortgage meltdown like it wasn’t even happening. Notably, the stock did too.

AZO given by Y-Charts

The economic weakness currently brewing is marked by supply chain issues that have not ruled out the auto parts market. Given that we have yet to see this slowdown in AutoZone’s revenue and earnings growth, I think it’s safe to say that AutoZone (and its peers) are avoiding the biggest problems of the supply chain.

In fact, I can’t help but think that most auto parts stores are actually the beneficiaries of global supply chain issues, which have limited the production of new vehicles. IHS Markit recently lowered its estimated new car production for 2020 to just 80.6 million units, still down from 2019’s 89 million. Consumers may have no choice but to keep their current vehicles in working order.

A faithful one you can count on

Daniel Foelber (Lockheed Martin): The war in Ukraine has shone a spotlight on defense contractors like Lockheed Martin that manufacture planes, missile systems and provide support services. Despite the increase in orders from American allies for Lockheed Martinit is (LMT 0.83%) products, the company announced a rather muted first quarter of 2022. The lesson here is that investors should not approach the pure defense contractor as a short-term investment, but rather understand why its gradual growth can be an excellent form of passive income over the long term.

The US government is its largest customer (over 75% of its business comes from the US government and the rest comes from US-approved allies). Lockheed’s backlog of contracts assures it of a steady revenue stream for years to come.

Lockheed’s main criticism has been its lack of growth. While it’s true that Lockheed’s sales and profits have climbed to low single digit rates in recent years, Lockheed makes up for its lack of growth with its strong dividend and reasonable valuation.

Lockheed has increased its dividend for 20 consecutive years and has a dividend yield of 2.6%. If it maintains its streak, it will become a dividend aristocrat – a component of the S&P 500 that has paid and increased its dividend for at least 25 consecutive years – by 2027. Lockheed also has a price-earnings ratio below 19, even if its share price is up 20% since the beginning of the year.

LMT Chart

LMT given by Y-Charts

So far this year, Lockheed has outperformed many of its defense contractor peers and easily beat the S&P 500 and the industrials sector. Some context is in order, as Lockheed stock had been an underperformer in the market until 2022, but is now roughly on par with the S&P 500 for the past five years.

Lockheed is not the kind of company that will impress investors with exceptional growth. And given the tedious process of winning tenders and executing contracts, much of Lockheed’s growth is beyond its control and dependent on government funding. However, barriers to entry for defense contracts are high, protecting Lockheed from competition.

Investors looking for a dividend-paying stock that can perform well despite the market cycle might consider Lockheed Martin now.

A pending acquisition leaves room for an attractive upside

Keith Noonan (Activision Blizzard): Under normal circumstances, ActivisionBlizzard (ATVI 0.91%) might seem like an odd choice for a stock that is well-suited to posting gains in bear market and recessionary conditions. The video game publisher has generally traded at growth-dependent valuations that open the door to volatility, and its business has not been completely immune to economic pressures despite demand for interactive entertainment that has held up relatively well in difficult times. However, the company is on track to be acquired by Microsoft over the next year, and its shares are still trading at a substantial discount to the buyback price.

With Activision Blizzard stock currently trading at around $78 per share, it offers about a 22% upside from the $95 per share price at which Microsoft is set to acquire the publisher. Why can shares be purchased at such a discount when the deal appears to be close to closing in the near future? Well, the market thinks there’s a big risk the deal won’t get the necessary approvals from the Federal Trade Commission and other regulators.

Microsoft is one of the most powerful technology companies in the world, and it also has a strong position in the gaming industry through its Xbox and PC platforms and services. With that in mind, it’s no shock that investors think there will be antitrust stalemates that could ultimately frustrate the deal with Activision.

On the other hand, Microsoft is actually far behind its rivals. Sony Group and nintendo when it comes to console market share, and its true competition extends beyond those heavily gaming-focused gamers. Companies including Amazon, Metaplatforms, Apple, Alphabetand Tencent Holdings also have encompassing platform and service ecosystems, and Microsoft can argue that its acquisition of Activision doesn’t significantly tip the scales (or even increase competition) in the big tech world. waltz disney and AT&T have made similar arguments when successfully pursuing even larger media acquisitions over the past few years.

The market is pricing a significant chance the deal won’t materialize, but the risk seems overblown, and the prospect of a 22% net return in about a year’s time is attractive given current market conditions. and the fact that it is an all-cash affair. I own Activision Blizzard stock and intend to hold my stock until the acquisition is complete.