Surviving the bear: A guide to evaluating stocks during a recession
MANILA -Investing in stocks can be a rewarding experience because it provides you the opportunity to grow your wealth over time. However, it’s not without its risks, particularly during a bear market.
When stock prices are falling, it’s easy to become overwhelmed with emotion and make rash decisions that can negatively impact your investment portfolio.
A bear market is typically characterized by a prolonged period of declining stock prices, economic uncertainty and widespread pessimism among investors.
During these times, it’s essential to take a step back and analyze your investment strategy carefully.
It can be tempting to sell your stocks and cut your losses, but this can be a costly mistake. Instead, you need to stay calm and focused, and understand that bear markets are a natural part of the market cycle.
By following a clear criteria of investing, you can minimize your risk, and achieve your investment goals.
Here are the five ways you can select the best stocks to invest in:
1. Choose stocks that are easy to understand
During a bear market, it’s essential to choose your stocks carefully. As a beginner, it’s best to start with stocks that you are familiar with. Understanding how a company operates and makes money is crucial in determining its growth prospects and potential for appreciation.
When stock prices are falling, it’s important to invest in companies that have a stable business model and have a higher probability of surviving an economic downturn. This is where your familiarity with a company’s brand and operations can come in handy.
For instance, you may be familiar with the business models of well-known brands such as Jollibee, SM or Meralco, but you may not have the same level of understanding for less popular companies like AC Energy, Medic or Cirtek Holdings.
While it may be tempting to invest in companies with unfamiliar brands or complicated operations during a bear market, it’s advisable to stick with what you know best.
Once you have gained confidence in investing and have a better understanding of the market, you can always expand your options by learning about other companies.
Remember, investing in stocks during a bear market requires a cautious approach, and starting with companies that you are already familiar with can help mitigate risks and increase your chances of success.
2. Choose stocks with solid financial health
After you have chosen the stocks that you are interested in, it’s important to assess the financial well-being of the companies you are planning to invest in.
An essential step is to examine their financial reports, which can be found on their websites under the investor relations section. When analyzing these reports, it’s essential to not just focus on the most recent quarterly earnings report but also to review the annual financial statements for the past three years.
This will allow you to see if the company has been growing and earning consistently over time. One of the most important pieces of information to look for in the income statement report is the company’s earnings data. Additionally, it’s useful to check the revenue growth and margins in the same financial statement.
Another crucial report to review is the company’s borrowing levels, which can be found in the Balance Sheet report. It’s important to determine if the company is borrowing excessively and potentially putting its profitability at risk.
Ultimately, the potential for a stock’s value to appreciate is tied to its earnings outlook. Therefore, it’s essential to learn how to read basic financial statements and evaluate the financial health of a company before making investment decisions during a bear market.
3. Choose stocks with strong cash flows
When the economy is in a downturn, it becomes even more important to carefully evaluate a company’s financial health before investing. While earnings growth is an important factor, reported earnings can be artificially inflated through creative accounting practices.
To ensure that you are choosing a stock with high-quality earnings, it is important to verify reported earnings with positive operating cash flows, which can be found in the company’s Cash Flow Statement.
Cash flow is the lifeblood of any business, and analyzing a company’s cash flow performance can provide valuable insights into its overall performance and financial stability.
4. Choose stocks with sustainable competitive advantage
There is always the risk that companies performing well financially today may not maintain their success in the future, as new competitors may emerge and challenge their market position.
To mitigate this risk, it’s important to select companies with strong barriers to competition that can sustain above-average profits over a long period of time.
Such barriers may include access to proprietary technology, having a strong brand that is widely recognized and trusted, having high economies of scale that allow for lower production costs, having exclusive access to key distributions channels, and having strong customer loyalty.
Examples of companies with these qualities include San Miguel Corp, Puregold, Globe Telecom and Universal Robina.
5. Choose stocks that are underpriced by the market
Just because a stock is priced at P1.00 per share, it does not necessarily mean that it is cheap. Likewise, a stock that is priced at P1,000 per share does not automatically mean that it is expensive.
One easy way to determine whether a stock is expensive or not is by comparing their price multiples. The Price-to-Earnings (P/E) ratio is one of the most widely-used multiples in the market. The lower a stock’s P/E ratio, the more attractive it appears to investors.
For instance, PLDT’s stock price of P1,230 may be cheaper than Globe’s share price at P1,723, but if we compare them based on Price-to-Earnings (P/E) ratios, Globe will come out relatively cheaper at 7.35 times P/E versus PLDT’s 26.3 times P/E.
While using P/E ratios may seem simple and straightforward, keep in mind that this is just a preliminary screening tool.
