Market Crash Predictions and 10 Stocks to Buy for Bad Times

Published on January 24, 2022 at 8:58 am by Usman Kabir in Hedge Funds, News

In this article, we discuss the market crash predictions and 10 stocks to buy for bad times. If you want to skip our detailed analysis of these stocks, go directly to the Market Crash Predictions and 5 Stocks to Buy for Bad Times.

It is no secret that the United States economy is in a state of turmoil and may be heading towards a crash in the coming months. In fact, market experts like Michael Burry of Scion Asset Management and veteran investor Kyle Bass have both repeatedly warned of such a crash, blasting buyers of growth equities as “speculators”. The statistical indicators of a looming crash are slowly appearing as well. The growth-heavy S&P 500 is on a downward trend in early 2022, the growth of the largest economies is slowing, and inflation is rising at an unprecedented rate.

Analysts Predict 2022 Market Crash

Apart from Burry and Bass, several other analysts have also forecast a market crash in 2022. Harry Mamaysky, a professor at Columbia Business School, told The New York Times earlier in January that the overall view on Wall Street was that inflation is transitory, a perception that the professor warned could have dire consequences. According to Mamaysky, if inflation persisted and the Federal Reserve moved in to raise interest rates, a scenario that seems imminent now, “things could get a lot worse” in terms of economic growth.

Similarly, Greg McBride, an analyst at Bankrate, has said that 2022 is going to be a “bumpier ride” for investors in 2022 as returns will be hard to come by, in stark contrast to the earnings of 2020 and 2021. The analyst has highlighted that even if the economy continues to grow, as several experts contend, the tightening fiscal policies will raise concerns about soaring valuations, in turn leading to increased volatility. McBride also forecast that corporate profits, which reached record highs in 2021, were unlikely to expand at the record pace, even though they might grow, in 2022.

Bitcoin Bears Warn Coin Will Slump

There are increased concerns around cryptocurrencies as well. Carol Alexander, a professor of finance at Sussex University, said in late December that she expected Bitcoin to fall down to as low as $10,000 in 2022. The bearish remarks of the professor stem from her view that Bitcoin holds “no fundamental value” and is not a serious investment option. However, top experts on Wall Street, like billionaire Ray Dalio, have praised the coin as an inflation hedge in recent months, comparing it to gold as a a wealth preservation vehicle.

Todd Lowenstein, the chief equity strategist of Union Bank, appears to agree with Alexander in this regard. The strategist has underlined that the historical price data of Bitcoin suggests that there are multiple “bubble and bust” cycles for the currency, and in each instance, there have been “this time is different” arguments in favor of the coin. Lowenstein believes that the liquidity tide is receding, a factor that will, in an apparent reference to cryptocurrencies, “harm overvalued asset classes and speculative areas of the market”.

Slow GDP, Inflation, and Rising Interest: Market Shifts Towards Value

So far this year, the benchmark S&P 500 Index is down nearly 5%. In the fourth quarter of 2021, the Gross Domestic Product (GDP) growth of the Chinese economy was 4% year-on-year, the lowest in nearly two years. Meanwhile, inflation in the US jumped to nearly 7%, shattering decades-old records and forcing the Federal Reserve to announce that it will soon tighten monetary policy. As bond purchases wind down and interest rates rise, tech-related growth stocks are expected to undergo a broad correction in value.

Cryptocurrencies and other growth sectors like biotech, space, and fintech will all feel the heat of the stricter federal policies in the coming months. Investors have already started preparing their portfolios, most of which are growth-heavy due to the tech boom of the past few years, to manage the risk. In this environment, some of the stocks to buy for bad times include Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), and Lowe’s Companies, Inc. (NYSE:LOW), among others discussed in detail below.

Luis Louro / shutterstock.com

Our Methodology

The companies that have well-established reputations and solid track records in recessions were selected for the list. The business fundamentals and analyst ratings for these firms are also discussed to provide readers with some context for their investment choices.

Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each firm.

Market Crash Predictions and Stocks to Buy for Bad Times

10. Altria Group, Inc. (NYSE:MO)

Number of Hedge Fund Holders: 45

Altria Group, Inc. (NYSE:MO) makes and sells tobacco products. The stock is one of the most reliable on the market with regards to dividend payouts. Despite the overall decline in cigarette sales across the globe in the past few years, Altria Group, Inc. (NYSE:MO) has managed to register dividend growth, stretching an impressive growth history to 52 years. Defensive investors have been piling into the stock as inflation rises. Altria Group, Inc. (NYSE:MO) recently declared a quarterly dividend of $0.90 per share. The forward yield was 8.09%.

A healthy number of hedge funds back Altria Group, Inc. (NYSE:MO) to provide their portfolios with cover as interest rates rise and growth stocks become more volatile. At the end of the third quarter of 2021, 45 hedge funds in the database of Insider Monkey held stakes worth $829 million in Altria Group, Inc. (NYSE:MO).

Just like Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), and Lowe’s Companies, Inc. (NYSE:LOW), Altria Group, Inc. (NYSE:MO) is one of the stocks on the radar of value investors.

In its Q2 2021 investor letter, Broyhill Asset Management, an asset management firm, highlighted a few stocks and Altria Group, Inc. (NYSE:MO) was one of them. Here is what the fund said:

“Altria Group, Inc. (NYSE:MO) shook off the prospects of a ban on menthol and a potential cap on nicotine and gained 20%. We shared our thoughts on these regulations during the quarter, which are available here.

MO Valuation. Altria Group, Inc. (NYSE:MO) is up ~ 18% YTD (even accounting for the recent sell-off). We expect MO to generate close to $5 in annual FCF per share over the next few years, putting the stock at ~ 10x, which is less than half the market’s multiple today. Over the last decade, shares have traded at an average multiple of 15x and within a range of ~ 10x – 20x (+/-1 standard deviation). The stock yields 7.2% at the current price, close to a 6% premium to treasuries. Historically, shares have traded closer to a 3% premium to the 10Y, which would imply a ~ $75 share price.”

9. Target Corporation (NYSE:TGT)

Number of Hedge Fund Holders: 49

Target Corporation (NYSE:TGT), which operates as a general merchandise retailer, has attracted the attention of major hedge funds in recent years. GQG Partners is a leading shareholder in Target Corporation (NYSE:TGT) with 5.5 million shares worth more than $1.2 billion. At the end of the third quarter of 2021, 49 hedge funds in the Insider Monkey database owned stakes in Target Corporation (NYSE:TGT) worth $4.3 billion.

On January 12, Truist analyst Scot Ciccarelli initiated coverage of Target Corporation (NYSE:TGT) stock with a Buy rating and a price target of $270, noting that Target Corporation (NYSE:TGT) had made substantial improvements to stores and omni-channel capabilities, and looked set to capitalize on pandemic-related surge in demand in the near term.

In its Q2 2021 investor letter, Nelson Capital Management, an asset management firm, highlighted a few stocks and Target Corporation (NYSE:TGT) was one of them. Here is what the fund said:

“We added Target Corporation (NYSE:TGT) to our consumer staples sector. Target offers a broad array of products in owned and known brand items at affordable prices. Its omnichannel fulfilment centers allow customers to receive their items via in-store pickup, curbside pickup, same-day shipping and regular shipping while simultaneously reducing operating costs. With a significantly lower valuation than peers and a unique operating strategy, Target Corporation (NYSE:TGT) is an attractive holding.”

8. Colgate-Palmolive Company (NYSE:CL)

Number of Hedge Fund Holders: 54

Colgate-Palmolive Company (NYSE:CL) has a stable consumer goods business that markets low cost products. These products are generally bought every month by consumers, leading to solid earnings for Colgate-Palmolive Company (NYSE:CL) even in crisis situations. Over the last decade, even though the sales growth numbers for the company are not very impressive, the gross margins have still improved by over 4%. The free cash flow has grown 40% during the period. Colgate-Palmolive Company (NYSE:CL) has a market cap of over $70 billion.

Hedge funds recognize the potential of Colgate-Palmolive Company (NYSE:CL) and have consistently backed it to deliver solid returns. At the end of the third quarter of 2021, 54 hedge funds in the database of Insider Monkey held stakes worth $2.5 billion in Colgate-Palmolive Company (NYSE:CL).

Here is what First Eagle Investment Management has to say about Colgate-Palmolive Company (NYSE:CL) in its Q1 2021 investor letter:

“The leading detractors in the quarter (included) Colgate-Palmolive Company (NYSE:CL). After a strong 2020 fueled in part by lockdown-driven demand, consumer staples stocks generally cooled during the first quarter as investors shifted attention to the more economically sensitive areas of the market likely to benefit from re-openings and improved discretionary spending. The effects of this rotation could be seen in the share price underperformance of names like Colgate-Palmolive Company (NYSE:CL).”

7. Costco Wholesale Corporation (NASDAQ:COST)

Number of Hedge Fund Holders: 55

Costco Wholesale Corporation (NASDAQ:COST) has been among the favorite stocks of hedge funds for years. At the end of the third quarter of 2021, 55 hedge funds in the database of Insider Monkey held stakes worth $4.39 billion in Costco Wholesale Corporation (NASDAQ:COST), up from 54 in the preceding quarter worth $4.32 billion.

On January 12, Truist analyst Scot Ciccarelli initiated coverage of Costco Wholesale Corporation (NASDAQ:COST) stock with a Buy rating and a price target of $606, noting that Costco Wholesale Corporation (NASDAQ:COST) had “unrivaled” buying power due to size and purchasing concentration and consistently provided members with “extreme” value. The firm posted double digits year-on-year gains in comparable sales for December recently. Stocks like Costco, Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), and Lowe’s Companies, Inc. (NYSE:LOW) can weather the storm that is coming amid expected rate hikes in 2022.

In its Q1 2021 investor letter, Ensemble Capital, an asset management firm, highlighted a few stocks and Costco Wholesale Corporation (NASDAQ:COST) was one of them. Here is what the fund said:

“We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Another example was the market’s reaction to Costco Wholesale Corporation (NASDAQ:COST) (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco Wholesale Corporation (NASDAQ:COST) shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.

Analysts also complained about Costco Wholesale Corporation (NASDAQ:COST) raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.”

6. The Home Depot, Inc. (NYSE:HD)

Number of Hedge Fund Holders: 58

The Home Depot, Inc. (NYSE:HD) is one of the companies best-positioned to take advantage of the rising home prices in the United States. It has over 2,000 retail stores across the US that look set to witness a surge in demand for products as homeowners push for remodels to take advantage of rising home prices. The fundamentals are also strong. The cash-generating ability of The Home Depot, Inc. (NYSE:HD) is also outstanding. The Home Depot, Inc. (NYSE:HD) has grown revenue at an average rate of over 9% in the past five years.

All these factors have convinced hedge funds to take a bullish stance on The Home Depot, Inc. (NYSE:HD) for 2022. Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in The Home Depot, Inc. (NYSE:HD) with 7.4 million shares worth more than $2.4 billion.

Along with Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), and Lowe’s Companies, Inc. (NYSE:LOW), The Home Depot, Inc. (NYSE:HD) is one of the stocks that hedge funds are buying.

In its Q1 2021 investor letter, Ensemble Capital, an asset management firm, highlighted a few stocks and The Home Depot, Inc. (NYSE:HD) was one of them. Here is what the fund said:

“Notable contributors to the Fund’s returns this quarter (included) The Home Depot, Inc. (NYSE:HD). Home Depot (8.9% weight in the Fund) continued to benefit from a red-hot housing and home improvement market, delivering record financial performance in 2020. As a high return on invested capital business, any step-up in growth results in considerable shareholder value creation. While 2021 comparable sales may not yield impressive headline results, we believe there are several secular tailwinds supporting continued housing investment, including millennials entering prime household formation/peak earnings years, relatively low interest rates, and government policies.

The Home Depot, Inc. (NYSE:HD) (8.9% weight in the Fund): The big orange sign of Home Depot is a familiar sight for homeowners across the country. Despite the rise of Amazon, Home Depot has generated outstanding results for shareholders during the rise of eCommerce, even as Home Depot’s end market in housing suffered the worst collapse in a century. Over the last fifteen years, a period which began at the peak of the housing bubble, Home Depot’s stock has generated annual returns of 17% a year, outperforming the S&P 500 by approximately 7% a year.

But while homeowners can attest to their continued shopping at The Home Depot, Inc. (NYSE:HD), they may not be aware that only about half the company is dedicated to serving Do It Yourself homeowners, with the other half acting as a key supplier to small contractors – which the company calls Pros – who depend on Home Depot as a mission critical business partner.

While the company does not report on their contractor business separately from their homeowner business, they have regularly offered comments indicating that contractors make up just 4% of their customer base, but about 45% of revenue. Basic math implies…”[read the entire letter here]

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