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5 Must-Buy Stocks to Gain From an Expected Bear Market Rally

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·6-min read
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The free fall of the U.S. stock markets, since the beginning of this year, continues as we approach the end of the first half of 2022. Investors are highly concerned about soaring inflation and the Fed’s tighter-than-expected monetary policies.

Market participants are facing the real effect of the pandemic as the impact of coronavirus and its variants on daily activities is now much less. As real-life activities return to normalcy and fiscal and monetary stimuli have stopped, the pain of the pandemic is being felt by investors.

However, in line with Wall Street’s steady decline, the valuation of most of the stocks, irrespective of market capitalization, sector and industry, has corrected significantly. U.S. stocks are no longer overvalued. In fact, for a large section of equity market, chances of a further decline are limited.

Although we are not expecting a rebound from the current bear market anytime soon, a pullback — popularly known as a bear market rally — is long overdue. In order to tap that expected rally and gain in the near term, we have selected five stocks with a favorable Zacks Rank. These are - Archer-Daniels-Midland Co. ADM, W. R. Berkley Corp. WRB, Marathon Petroleum Corp. MPC, Continental Resources Inc. CLR and Aspen Technology Inc. AZPN.

A Sharp Correction in U.S. Stock Markets

Wall Street had seen an astonishing rally in the last two years after exiting the coronavirus-induced short bear market. The pandemic-led bear market reached its trough on Mar 23, 2020. The Dow, the S&P 500 and the Nasdaq Composite posted their recent highs on Jan 5, 2022, Jan 4, 2022 and Nov 22, 2021.

From Mar 23, 2020 to the recent highs, the Dow, the S&P 500 and the Nasdaq Composite have rallied 102.9%, 119.8% and 144.5%, respectively. However, from their recent highs to Jun 17, 2022, the Dow, the S&P 500 and the Nasdaq Composite — have plummeted 19.1%, 23.7% and 33.4%, respectively.

The Nasdaq Composite has been in a bear market since Mar 7. The S&P 500 entered the bear market on Jun 13. The Dow is knocking on the same door, while the small-cap benchmark Russell 2000 has also entered the bear market and has tumbled 32.3% from its recent high recorded on Nov 8, 2021.

Year to date, the Dow, the S&P 500 and the Nasdaq Composite – have tanked 17.8%, 22.95 and 31%, respectively. Over 1,450 stocks have slid more than 50% year to date and over 500 stocks have slumped more than 70% in the same period. Therefore, at this stage, the likelihood of at least a bear market rally is high.

How to Tap a Likely Relief Rally

In order to gain from a possible near-term rally, we have selected five large-cap (market capital > $10 billion) stocks that have provided double-digit returns year to date despite the market mayhem.

These stocks have strong potential for the rest of 2022 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Continental Resources has a premier position in the Bakken region, which is one of the largest onshore oilfields in the United States. CLR’s operations in the SCOOP and STACK plays of Oklahoma generate huge profits.

Continental Resources acquired Delaware Basin assets from Pioneer Natural Resources, marking its entry into the prolific Permian Basin. This will significantly boost its free cash flows. Also, CLR revised its average oil production upward to 200,000-210,000 bbls/d for the year.

Continental Resources has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 3.3% over the last 30 days. The stock price of CLR has jumped 47.1% year to date.

W. R. Berkley has been benefiting from its insurance business, performing well on the increase in premiums written over the past many years. W. R. Berkley has been investing in numerous startups since 2006 and has established new units in growing international markets.

W. R. Berkley’s international business is poised for growth supported by the emerging markets. WRB’s solid capital position enables capital deployment. Investment in alternative assets should help improve investment income going forward.

W. R. Berkley has an expected earnings growth rate of 15% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 6.5% over the last 60 days. The stock price of WRB has advanced 21.6% year to date.

Marathon Petroleum is poised for further price gains based on a slew of positives. MPC’s $21 billion sales of its Speedway retail business provided it with a much-needed cash infusion. The deal also comes with a 15-year fuel supply agreement under which Marathon Petroleum will supply 7.7 billion gallons of gasoline per year to 7-Eleven, thus ensuring a steady revenue stream.

MPC’s exposure to more stable cash flows from the logistics segment diversifies the earnings stream and offers a buffer against the volatile refining business. Consequently, Marathon Petroleum is primed for significant capital appreciation and is viewed as a preferred downstream operator to own now.

Marathon Petroleum has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 34.9% over the last 30 days. The stock price of MPC has climbed 36.4% year to date.

Aspen Technology provides asset optimization solutions in the United States, Europe, the Asia Pacific, Canada, Latin America and the Middle East. AZPN’s performance has been benefitted from improving customer demand. Aspen Technology’s diversified product portfolio especially its asset optimization and management software solutions and Asset Performance Management suite is witnessing healthy momentum.

Rapid adoption of cloud-based solutions, proliferation of big data analytics and Internet of Things technologies, along with higher spend on software, will likely drive AZPN’s top line in the long haul. Strategic acquisitions are likely to boost the top line of Aspen Technology going forward. The integration with Emerson’s OSI Inc and the Geological Simulation Software business bodes well in the long haul.

Aspen Technology has an expected earnings growth rate of 16.2% for next year (ending June 2023). The Zacks Consensus Estimate for next-year earnings has improved 1.1% over the last 30 days. The stock price of AZPN has appreciated 24.3% year to date.

Archer-Daniels-Midland has been gaining from solid demand, improved productivity and product innovations. Persistent growth in the Nutrition segment of ADM, driven by significant gains in the Human and Animal Nutrition units, remained the key growth drivers. Archer-Daniels-Midland expects the nutrition segment’s operating profit growth of 20% in 2022. The company has been significantly progressing on its three strategic pillars — optimize, drive, and growth.

Archer-Daniels-Midland has an expected earnings growth rate of 22% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.3% over the last 30 days. The stock price of ADM has surged 14.4% year to date.


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