Morningstar says to target these 9 high-quality stocks poised for long-term gains in a landscape ridden with bear-market traps

  • Bear-market traps can hurt unsuspecting investors if they aren’t careful while selecting stocks.
  • With fundamentals mattering now more than ever, Dave Sekera shared two secular themes he’s watching.
  • Sekera also recommended nine stocks investors should consider for long-term growth and gains.

Buy low, sell high” is an investing adage as old as time — so obvious, fundamental, and well-hammered into the rulebook that it’s become a cliché.

In a time like the present, when the bear market can’t seem to make up its mind which direction it wants to go, investors may be tempted by sinking prices to buy stocks on the dip. That way they can ride the wave higher in the event of a rally. But what if that rebound never materializes?

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, says this type of bargain-hunting features a common fallacy that often hurts investors in the end. According to Suzuki, in seven out of the last ten bear markets, investors who were late to the game actually made better returns than investors who were early.

“History suggests that it’s better to be late than early,” said Suzuki in an August market commentary. “Not only does this tend to improve returns while drastically reducing downside potential, but this approach also gives one more time to assess incoming fundamental data. Because if it’s not based on fundamentals, it’s just guessing.”

Suzuki also pointed out that the three bear markets that were exceptions to the rule — in 1982, 1990, and 2020 — occurred while the Federal Reserve was already cutting interest rates. But given Fed Chair Jerome Powell’s hawkish commentary in August and an expected 75-basis point rate hike later this month, Suzuki believes it’s still “premature” for investors to significantly increase their equity exposure — if they’re not careful about their selection.

9 stocks to play 2 secular themes

To Suzuki’s point, in an environment laden with bear traps, what are equity investors to do? Well, they certainly shouldn’t despair, said Dave Sekera, chief US market strategist at Morningstar — but they do need to be extremely careful about investing in companies that fundamentally have “long-term sustainable competitive advantages.”

“We think there’s actually a lot of opportunities in the marketplace right now,” he explained in a recent episode of the “Morningstar Investing Insights” podcast. “Based on this pullback, we think the market from a broad perspective is actually trading at about a 15% discount to a composite of the fair values of the companies that we cover that trade on US exchanges.”

According to Sekera, some of the biggest opportunities lie within two thematic opportunities he’s following into the second half of 2022 — projected long-term secular growth in the electric vehicle and cybersecurity markets.

The first opportunity is the lithium subsector — an area where he sees long-term secular growth as the electric vehicle market continues to rise.

“We project right now that by 2030, about two thirds of all global new auto production will be electrified, whether they’re battery electric vehicles or hybrid vehicles,” he said.

And even as lithium production is expected to increase over the next decade, Sekera believes that exorbitant demand will keep the market undersupplied and drive prices higher. Specifically, he recommended three pure play lithium stocks as attractive buys — Lithium Americas (LAC), which he said is currently trading below half of the company’s long-term value; and Albemarle (ALB) and Livent (LTHM), both of which he said are currently trading at a 20% discount to fair value.

Because electric vehicles require two to three times more specialty chemicals than internal combustion engines, Sekera, for exposure to the electric vehicle theme he also recommended investing in specialty chemicals companies like DuPont (DD) and Eastman Chemical (EMN). Additionally, investors can also consider auto parts suppliers like BorgWarner (BWA), a company Sekera emphasized not only currently trades at about half of Morningstar’s fair value estimates but also has the robust product lineup required to support the growth of electric vehicles.

The second thematic opportunity Sekera has been tracking is the cybersecurity subsector. 

“Just based on the global political situation that we’ve seen and the increase in ransomware attacks, cybersecurity’s becoming ever more important to companies,” he explained. “We see a long-term secular growth in the cybersecurity market, and I think the specific sector has a lot of really attractive dynamics to it.”

According to Sekera, attractive buys within this sector include Okta (OKTA), Fortinet (FTNT), and Zscaler (ZS), which he said were trading at a respective 50%, 25%, and 25% discount to their fair value estimates.

The nine stocks Sekera recommended are aggregated below, along with each company’s ticker, market capitalization, and respective subsector.