This year certainly hasn't gone as many investors wanted or expected it would. After enjoying minimal volatility in 2021, all three major U.S. indexes plunged into a bear market in 2022. The growth-dependent Nasdaq Composite, which has largely been responsible for lifting the broader market to new highs, has been this year's biggest drag.
Yet the interesting thing about stock market corrections, crashes, and bear markets is that they always pave the way for a new bull market. Historically, corrections and bear markets don't last very long. Even more importantly, every double-digit percentage decline in the major U.S. stock indexes has eventually been recouped in its entirely by a bull market rally. In other words, it's not a matter of if but when the next bull market will take shape.
With a number of game-changing companies valued at a discount during the 2022 bear market, now is the ideal time for patient investors to pounce. What follows are five must-own stocks for the next bull market.
Image source: Getty Images.
Upstart Holdings
The first innovator that investors are going to want to own when the next bull market takes shape is cloud-based lending platform Upstart Holdings (UPST -2.48%). Although rapidly rising interest rates are weighing down lending demand and are likely to increase loan delinquencies in the near term, Upstart's technological advantages stand out in an industry ripe for disruption.
Instead of relying on an age-old loan-vetting process, Upstart's lending platform leans on machine-learning and artificial intelligence (AI). According to the company, 75% of all loans were approved and fully automated during the September-ended quarter. Processing loans this way takes less time and is notably cheaper for the 83 banks and credit unions that have partnered with Upstart.
What's more, Upstart approvals have proved more encompassing than the traditional vetting process, meaning people with lower average credit scores are being approved. The interesting thing is that Upstart's AI-based platform has produced a loan delinquency rate similar to the traditional vetting process. The takeaway is that Upstart can grow the lending pool for banks and credit unions without adversely impacting their credit-risk profile.
Also, keep in mind that Upstart is just getting its feet wet in auto loan originations and small business loans. The origination potential in these two categories is many multiples higher than personal loans, which is where Upstart has generated most of its revenue since inception.
Broadcom
Semiconductor solutions specialist Broadcom (AVGO -1.52%) is another must-own stock for the next bull market. Even though near-term recessionary fears could weigh on demand for chips and accessories, these worries tend to be short lived.
The clear-cut catalyst for Broadcom for at least the next three or four years is the ongoing upgrade of wireless infrastructure to support 5G wireless download speeds. The last time domestic telecom companies enacted sweeping download speed improvements was roughly a decade ago. With 5G at hand, businesses and consumers are liable to steadily upgrade their devices to take advantage of faster download speeds. That's great news for Broadcom, which brings in most of its revenue from selling wireless chips and accessories used in next-generation smartphones.
However, the company might enjoy even faster growth prospects from its smaller sales segments. For instance, Broadcom provides access and connectivity chips used in data-center servers. With businesses shifting their data online and into the cloud at a torrid pace, data center demand should only climb.
Additionally, Broadcom has grown its quarterly payout by 5,757% since 2010. With a hearty backlog, Broadcom is better positioned than most semiconductor stocks to weather whatever the U.S. economy throws its way.
Warner Bros. Discovery
A third must-own stock for the coming bull market that's probably not on many investors' radars is media stock Warner Bros. Discovery (WBD 0.61%). Though near-term ad spending is down and the company is navigating its way through merger-related expenses, neither of these concerns have long-term implications.
The first thing that should have investors excited is the steady growth of Warner Bros. Discovery's direct-to-consumer segment (i.e., its streaming services). The company closed out the most recent quarter just shy of 95 million streaming subs, which is up 15 million from the previous year. Over the next one to two years, streaming losses have the potential to shift to healthy profits as ongoing cord-cutting leads consumers to make smart decisions about where they spend their money for content.
Combining Time Warner and Discovery earlier this year to create Warner Bros. Discovery is also a win from a content and cost-saving perspective. The two companies offer a broader library of original content that should help retain streaming subscribers. Further, management expects cost synergies to eventually hit at least $3.5 billion.
Finally, advertising revenue is cyclical. While ad-driven businesses may be struggling at the moment, periods of economic expansion last disproportionately longer than economic contractions and recessions.
Fiverr International
Another must-own innovator that's a no-brainer for the next bull market is online-services marketplace Fiverr International (FVRR -4.64%). Although a recession could hurt demand for freelance labor for a couple of quarters, the long-term expansion of the U.S. economy favors Fiverr.
As I've extolled in the past, Fiverr brings differentiation and competitive advantages to the table that its peers can't match. For example, Fiverr's freelancers present their projects/tasks with an all-encompassing price. Comparatively, most freelancers on other marketplaces price their work on an hourly basis. Buyers on Fiverr's marketplace are getting superior price transparency, which is probably why we've seen steadily increasing spend per buyer on the platform.
Likewise, Fiverr's take-rate is unmatched among online-service marketplaces, the "take-rate" being the amount of each deal the company keeps as revenue. Ideally, online-service marketplaces want to keep as much as possible without driving away freelancers or buyers. Fiverr has been able to continuously increase its take-rate to 30% on the nose, as of the end of the third quarter.
Lastly, consider that the COVID-19 pandemic has completely changed the work landscape. With more people working remotely than at any point throughout history, demand for freelance work isn't going to slow anytime soon. Fiverr finds itself on the leading edge of this gig economy shift.
Berkshire Hathaway
The fifth must-own stock for the next bull market is a company that might not be a household name, but should be: Berkshire Hathaway (BRK.A 0.50%) (BRK.B 0.29%). Berkshire is the company run by billionaire investor extraordinaire Warren Buffett.
Though Berkshire Hathaway is a seemingly great investment in any environment, it's an especially smart buy for a bull market due to three factors. To start with, it's an absolute income maven. Over the next 12 months, Buffett's company is on pace to collect north of $6 billion in dividend income. Companies that pay a dividend are usually profitable and have a history of long-term outperformance.
Berkshire Hathaway's investment portfolio and the roughly five dozen companies it's acquired over more than five decades are predominantly cyclical. Businesses that are cyclical struggle when the economy enters a recession and thrive when it's expanding. Since expansions last considerably longer, the Oracle of Omaha is playing a simple numbers game that strongly favors the patient.
The third reason to buy Berkshire Hathaway stock for the next bull market is its hearty capital return program. Even though Berkshire doesn't pay a dividend, Buffett and executive vice chairman Charlie Munger have overseen the repurchase of $63.1 billion worth of Berkshire's Class A (BRK.A) and Class B (BRK.B) stock since mid-2018. Buybacks are a smart way to boost earnings per share for companies like Berkshire that offer steady or growing net income.
Sean Williams has positions in Warner Bros. Discovery. The Motley Fool has positions in and recommends Berkshire Hathaway, Fiverr International, and Upstart. The Motley Fool recommends Broadcom and Warner Bros. Discovery and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
