How to find value in a bear market

It's hard to predict the market after its recent roller coaster ride.

On Wednesday, May 4, the US stock market surged as investors looked at the expected and more pronounced interest rate policy, and those gains were erased by hawkish voices from some Fed officials late Thursday, May 5.

Is the bear market near its bottom?

Some investors got caught up in dumping all their holdings, while others stuck to their dip-buying strategy. Being a risk-taker or risk-averse investor is a personal appetite that will cause market divergence and volatility.

"We're finally getting to that point where everything is for sale, regardless of the quality of earnings. And that typically is what happens toward the end of a selloff, not the beginning," said Art Hogan, chief market strategist at National Securities.

How to find potential opportunities in a bear market?

A rising market underlies risks, while a falling market brings opportunities. Every stock market crash could signal a potential entry opportunity, whether it's a panic selling at the end of a bear market or a sharp pullback amid a bull market.

When panic prevails and stock prices fall precipitously, savvy investors attempt to benefit from the rebound via lapping up quality stocks.

Generally speaking, good stocks include but are not limited to three types.

Top-quality stocks in high-growth industries are generally the leading companies. These companies grow faster in revenue than the industry and have a considerable market share and great earnings prospects even if they are not necessarily profitable now. For example, in the new energy vehicle industry and the power battery industry, there are companies that have grown from small companies to global giants, such as Tesla and the lithium battery leader Contemporary Amperex Technology.

For example, Microsoft is experiencing slower growth as the computer industry enters maturity. Nonetheless, it still has enough profit and cash flow to tap into the cloud service business to restart growth. Take Apple as another example. The cell phone industry is also entering maturity, and Apple has limited growth potential. However, as a cash cow, it still retains the possibility of entering the new energy car and VR industry.

China's Kweichow Moutai could be another case in point. Despite the difficulty of having significant growth, its deep economic moat, high-profit margins, and cash flow still make it a good company in the eyes of investors.

Resource-based companies generally dominate cyclical stocks, such as oil, natural gas, coal, and steel. Take their performance in recent years to illustrate. These industries were hit hard at the beginning of the Covid-19 pandemic. For example, crude oil prices once collapsed into negative territory, but then climbed fairly high, driving up the prices of other resources. Cyclical stocks also ushered in a high boom cycle.

Leading companies in these industries are usually characterized by their massive scale and advanced production technology. Thus, they enjoy a great cost advantage that enables them to make no or fewer losses during an industry downturn, while making the most profits during an industry upturn. Investors also pay more attention to this kind of company. However, when investing in cyclical stocks, it is vital to keep an eye on the inflection point of the cycle so as to control the risk.