Nasdaq bear market: 3 extremely safe stocks you’ll regret not buying on the downside

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It’s been quite a year for the investment community. Since hitting all-time closing highs in the first week of January, the benchmark S&P500 and widely followed Dow Jones Industrial Average have both entered correction territory (i.e. a decline of at least 10%).

Meanwhile, things are even worse for companies dependent on growth. Nasdaq Compound (^IXIC 3.82%). After its all-time high in November 2021, the Nasdaq has fallen 27%. In fact, on May 5, the index had one of its worst single-day performances in history (a drop of 647 points). The fall of the Nasdaq officially places it in a bear market.

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While the speed of moves lower in the broader market can sometimes be nerve-wracking during a bear market, history shows that putting your money to work during these spikes in volatility is a smart move. Indeed, every major stock market downturn has eventually been erased by a bull rally.

However, that doesn’t mean you have to be a hero and try to catch a falling knife. Instead, buying safe stocks that are trading at a discount can be very rewarding during a bear market. The following are three extremely safe stocks that you will regret not buying on the downside.

Microsoft

The first incredibly safe stock investor that stock investors can pick up with confidence is the software giant Microsoft (MSFT 2.26%).

Given what’s happened recently with tech stocks, some people might be hesitant to invest their money in Ole Softy. However, it is one of the few companies to react well after publishing its quarterly results. Additionally, its five-year monthly beta of 0.91 means it is 9% less volatile than the benchmark S&P 500.

One of the coolest things about Microsoft that few people know about, and what makes it such a safe stock, is its credit standing. Only two publicly traded companies sport the coveted AAA credit rating from Standard & Poor’s (S&P), and Microsoft is one of the two. It is a company with $104.7 billion in cash ($26.7 billion in net cash) that has generated $87.1 billion in operating cash flow in the past 12 months only. Even with $78 billion in combined debt and operating lease debt, S&P has the utmost confidence that Microsoft will meet its obligations.

From an operational perspective, Microsoft relies on its legacy segments for leading margins and cash flow, while increasingly relying on cloud solutions for growth.

For example, data from GlobalStats indicates that Windows accounted for 73% to 76% of the operating system market share worldwide over the past year (ending April 2022). Even if sales for Windows stagnate, cash flow from this segment can be used to push higher growth initiatives or facilitate acquisitions.

Meanwhile, cloud solutions are growing like wildfire. Azure is the world’s second-largest cloud infrastructure solution, based on enterprise spend, with sales up 49% at constant currencies during Microsoft’s fiscal third quarter (ended March 31, 2022). The beauty of cloud infrastructure is that it is still in its early stages of growth and producing very juicy operating margins.

Considering Wall Street expects Microsoft to grow sales by 15% or more per year, its P/E ratio of 25 for the coming year is quite reasonable.

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Johnson & Johnson

The healthcare conglomerate is an extremely safe second stock market for investors to buy during the Nasdaq bear market slump. Johnson & Johnson (JNJ -0.57%). Based on a five-year monthly beta of 0.72, J&J is considerably less volatile than the S&P 500.

As noted, only two publicly traded companies have a AAA credit rating from S&P. Microsoft is one and Johnson & Johnson is the other. To put this into context, the US federal government has been assigned an AA credit rating by S&P. This means that the rating agency has more confidence in J&J repaying its outstanding debts than in the US government doing the same. This should help nervous investors sleep better at night.

Another element to take into account is the defensive nature of the health sector. No matter how high inflation is or how poorly the US economy performs, people still get sick and need care. This establishes a baseline level of demand for prescription drugs, medical devices and health services. This effectively means that recessions don’t have much of an effect on J&J’s various healthcare operations.

Another reason why J&J has been such a superstar for investors is the fact that each of its operating segments brings something important to the table. For example, even though brand name pharmaceuticals have a limited period of exclusivity, margins and the potential for growth in prescription drug sales are what drive most of J&J’s operating margin. To guard against loss of exclusivity, the company is leaning on medical devices, which are perfectly positioned to benefit from an aging boomer population, and consumer healthcare products, which is a segment that J&J will soon create. Although the latter is growing slowly, it offers excellent pricing power and predictable cash flow.

Finally, Johnson & Johnson has increased its base annual payment in each of the past 60 years and, prior to the COVID-19 pandemic, had increased its adjusted annual profit for approximately 35 consecutive years.

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AT&T

The third safe bet investors will regret not buying during the Nasdaq bear market decline is the telecommunications company AT&T (T 0.61%). AT&T is the least volatile stock on this list, with a beta of just 0.65.

For years, historically low lending rates and accommodative monetary policy have rolled out the red carpet for growth stocks while slow and stable companies like AT&T have been left behind. But as interest rates start to climb and valuations come back into focus, AT&T’s earnings multiple of seven for the year ahead and some changes look quite tempting.

Although AT&T isn’t the growth story it was three decades ago, the company still has plenty of opportunities to evolve the needle over time. Right now, the clearest catalyst is the 5G revolution.

Upgrading the wireless infrastructure to support 5G speeds will be expensive and won’t happen overnight. On the other hand, it’s been about a decade since wireless download speeds were significantly improved. The ability to speed up downloads should prove attractive to consumers and businesses, and should result in a multi-year device replacement cycle. The key here is that data consumption is expected to increase as 5G access spreads – and data is where the juiciest margins can be made from AT&T’s wireless segment.

AT&T is also a big beneficiary of the recent spin-off of content arm WarnerMedia, which then merged with Discovery to create Discovery of Warner Bros.. When the deal closed last month, AT&T received $40.4 billion in cash. Additionally, AT&T announced well before the deal closed that it would be reducing its annual payment. Between the $40.4 billion in cash and the reduced payment, AT&T should have enough capital to deal with its high level of debt.

With a low price-to-earnings ratio, a 5.7% yield against inflation, and improved financial flexibility, AT&T ticks all the right boxes for conservative investors.