There’s no question that it’s been a challenging year to be an investor. Since hitting all-time highs during the first week of January, the iconic Dow Jones Industrial Average and broad-based S&P 500 have declined by 13.5% and 18%, respectively, as of May 11.
For the growth-stock-dependent Nasdaq Composite, it’s been an even more painful drop. Following its closing high six months ago, the index has plunged 29%.
Although big moves lower in the stock market can be scary and tug on investors’ emotions, it’s important to recognize that corrections (and even bear markets) are a normal and inevitable part of the investing cycle. When examined with a broader lens, every single notable drop throughout history in the major indexes proved to be a buying opportunity for patient investors.
More importantly, as the market plunges, deals on high-quality companies become more pronounced. What follows are three discounted stocks that long-term investors can confidently buy now and will more than likely never have to sell.
If there’s one stock that’s definitely demonstrated its ability to stand the test of time, its conglomerate Berkshire Hathaway (BRK.A 0.73%)(BRK.B 0.75%). Berkshire is the company headed by billionaire Warren Buffett.
Since taking the reins in 1965, Buffett has overseen the creation of more than $680 billion in value for shareholders (himself included), and has delivered an average annual return of 20.1%. In aggregate, we’re talking about an increase of more than 3,600,000% for the company’s Class A shares (BRK.A). Even though Berkshire Hathaway is susceptible to down years, there’s a long enough track record to show that it regularly outpaces the S&P 500 over long periods.
One of the reasons Berkshire Hathaway is such an astute investment is Warren Buffett’s love of cyclical companies. A “cyclical” business performs well when the U.S. or global economy is expanding, and can struggle when recessions or slowdowns occur.
The Oracle of Omaha is well aware that recessions are an inevitable part of the economic cycle. Rather than try to time when they’ll occur, he’s packed Berkshire Hathaway’s portfolio with companies that thrive during periods of expansion. The thing is, expansions last considerably longer than recessions, which puts Buffett’s portfolio in perfect position to benefit from the natural expansion of U.S. and global gross domestic product. It’s a boring strategy that pays off handsomely over time.
Berkshire Hathaway’s other not-to-subtle secret to success is the mountain of passive income it receives. Following big investments in Chevron and Verizon over the past two years, Buffett’s company looks to be on track to generate north of $6 billion in annual dividend income. Because companies that pay a dividend are often profitable and time-tested, they’re better equipped to deal with economic downturns.
Historically, any double-digit percentage decline in Berkshire Hathaway’s stock has been a green light for investors to go shopping.
Similar to Berkshire Hathaway, Mastercard isn’t immune to economic downturns and recessions. If consumers and businesses reduce their spending, sales and profits for Mastercard are likely to fall. The rising prospect of a recession in the U.S. is the likely reason shares of the company have declined by nearly 20% from their all-time high.
However, there are a multitude of reasons to be excited about Mastercard’s long-term opportunity. To start with, it’s a major player in the leading market for consumption: the United States. According to Securities and Exchange Commission filings from the four major credit card networks, Mastercard was responsible for nearly 23% of credit card network purchase volume in the U.S. in 2020. That’s a lucrative position to hold given that economic expansions vastly outpace recessions in length.
Investors can also be excited about, and take solace in, the fact that Mastercard strictly acts as a payment processor. Although it would likely have no trouble generating interest income and fees as a lender, becoming a lender means being exposed to loan delinquencies during recessions. Since the company doesn’t lend, no capital needs to be set aside during recessions. This explains why Mastercard’ is able to bounce back faster than most financial stocks following a downturn in the U.S. or global economy.
Speaking of the global economy, a majority of transactions are still being conducted in cash. Mastercard has a long runway to organically or acquisitively expand its payment infrastructure into emerging markets. Being able to lean on predictable cash flow from developed countries, as well as accelerated growth in emerging markets, should allow Mastercard to sustain a long-term annual growth rate of around 10%.
The third discounted stock that’s just begging to be bought and never sold is theme park operator and entertainment kingpin Walt Disney (DIS 2.90%). Shares of the company are nearly 44% below their 52-week high.
The biggest issue for Disney over the past two years has unquestionably been the unpredictability of the COVID-19 pandemic. Pardon the theme-park pun, but it’s seemed like a merry-go-round of park closures and mitigation measures needed to fight COVID-19. In the company’s latest quarterly report, it touched on closures in Hong Kong and Shanghai as adversely impacting Disney Park revenue.
While closed theme parks are less than ideal, the growing consensus among researchers appears to be that we’re passed the worst of what COVID-19 and its variants have to offer. Although it would be preferable if China’s response to COVID-19 cases were more in-line with the rest of the world, the key point is that theme park disruptions aren’t a long-term concern.
Aside from eventually moving past COVID-19 headwinds, Walt Disney continues to impress on the streaming front. As of the end of the fiscal second quarter (April 2, 2022), Disney+ had 137.7 million subscribers, which is up 33% from the prior-year period. Average monthly revenue per global subscriber was up 9% from Q2 2021, with the company pointing to strength in existing markets and from retail price increases.
Another reason the House of Mouse makes for such a no-brainer investment is its pricing power. Disney has a massive library of original content that helps it connect with people of all ages. Not to mention, its theme parks can make anyone feel young again. Walt Disney has never had an issue passing along price hikes to consumers, and is therefore able to stay well ahead of the prevailing inflation rate.
While Disney is facing its fair share of near-term headwinds, its long-term future remains bright.