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2 Earnings Winners to Scoop Up During the Bear Market

The bear market has been brutal. Given the trend in inflation and weakening economy, it's unlikely to end soon. For investors, the best strategy is to use the adverse market...

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This story originally appeared on StockNews

The bear market has been brutal. Given the trend in inflation and weakening economy, it's unlikely to end soon. For investors, the best strategy is to use the adverse market conditions to scoop up stocks that have a long-term history of compounding earnings. Therefore, investors should consider buying Builders FirstSource (BLDR) and Pfizer (PFE).

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The near-term market outlook remains cloudy especially as the stock market re-tests the June lows. However, if we take an objective look, the economy and financial markets are in a much worse place.

Hopes that inflation may have turned the corner were extinguished following the August CPI. In fact, it showed an acceleration in monthly core CPI, while the Fed is reportedly looking for a negative print or sequentially, lower readings before it considers pausing or slowing its hiking timetable. At the same time, we have increasing evidence that the economy is slowing and going to imminently rollover.

Needless to say, this is an exceptionally challenging environment for investors. Their first priority has to be capital preservation. Yet, we also intuitively know that the best stocks can only be bought at a discount during these types of adverse conditions. Therefore, investors should target stocks with a long-term history of earnings growth like Pfizer (PFE), and Builders FirstSource (BLDR).

Pfizer (PFE)

PFE is one of the world’s top pharmaceutical companies. This sector has also outperformed in recent months as its revenues and earnings are largely disconnected from economic growth or changes in monetary policy. Further, these companies have heavy pricing power over drugs under patent and a strong balance sheet with low debt and $25 billion in cash.

PFE has also demonstrated the ability to constantly develop and bring to market blockbuster drugs. 

In 2021, the company earned $4.42 in EPS and $81.3 billion in revenue. This year, analysts are forecasting $7.16 in EPS and $108.2 billion in revenue. These equate to very impressive growth rates of 62% and 30%. Despite such strong growth, the stock is quite cheap with a forward P/E of 9.

PFE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s annual performance of 8.0%. 

In terms of component grades, PFE has a B for Quality due to its strong balance sheet, above-average margins, and well-regarded management team. It also has a B for Value due to its P/E being half of the S&P 500 despite faster growth and bigger margins. For PFE’s complete POWR Ratings, click here.

Builders FirstSource (BLDR)

It’s clear that the housing market has slowed down in a major way due to higher mortgage rates and high prices which have made affordability an issue, but the underlying supply and demand fundamentals remain supportive. Essentially, there is a demographic bulge as Millennials enter their 30s and 40s, while the supply of available housing is quite low relative to historical averages.

This bodes well for companies like BLDR which is a producer and supplier of building materials. It primarily sells to homebuilders, contractors, remodelers, and construction companies. Some of its major products are dimensional lumber and lumber sheet goods, millwork, windows, interior and exterior doors, and other building products. It also offers construction-related services such as professional installation, turn-key framing, and shell construction, spanning all its product categories.

What’s interesting about BLDR (and many stocks in the housing sector) is that they have experienced sharp pullbacks due to rising rates and fears of a potential slowdown in the economy. This is reflected in BLDR's valuation and cash flow.

This type of valuation means that investors have already discounted a contraction in earnings. 

BLDR’s low valuation means that it can deliver stellar returns for investors by continuing to deliver solid earnings growth. One potential catalyst is for the Fed to hike at a slower pace than what is expected by the market. Another is that inflationary pressures could ease which could lead to higher margins and revenues. 

BLDR’s POWR Ratings are consistent with this combination of deep value and earnings growth. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s average annual 8% gain. 

It’s also quite strong in terms of component grades. The stock has an A for Growth as revenues and EPS have climbed by 158% and 508% over the last 2 years. Next year, Wall Street analysts are projecting a year of consolidation with 1% revenue growth and a 9% drop in EPS. 

However, if the housing market can defy skeptics with its resilience, then BLDR could have major upside, especially with valuations so low. Click here to see additional POWR Ratings for BLDR. 

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PFE shares fell $0.19 (-0.43%) in premarket trading Thursday. Year-to-date, PFE has declined -22.98%, versus a -21.08% rise in the benchmark S&P 500 index during the same period.



About the Author: Jaimini Desai


Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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The post 2 Earnings Winners to Scoop Up During the Bear Market appeared first on StockNews.com

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