Research shows that investors tend to invest when there’s euphoria in the stock market. So, when the stock market is doing well or bullish, investors feel good that stock prices are going up and end up putting more money into stocks.
When stocks take a bearish turn, fear often envelops investors. However, to hit the jackpot, investors need to be counter intuitive and actually buy more in a bear market. Though, they better pick stocks wisely by focusing on wonderful businesses with durable profits. It also helps to take a Foolish investing approach.
Buy more during a bearish turn
For example, during the pandemic flash market crash in 2020, the Canadian stock market correction witnessed a drop of about 20%. Today, the market is close to 60% higher from the March 2020 bottom. Including its quarterly cash distributions, the market has returned close to 79% in the period. The market’s current cash distribution yield is approximately 3.3%. Market exchange traded funds like iShares S&P/TSX 60 Index ETF are the go-to investments for investors who want to spend little time on managing their investments.
Otherwise, you can explore buying a diversified portfolio of stocks when the market takes a bearish turn. When investors are able to invest more during such gloomy periods, they could actually be fast-tracking their long-term wealth creation.
Wonderful businesses seldomly go on sale. During stock market corrections, investors can consider buying top TSX stocks like Constellation Software (TSX:CSU) and Dollarama (TSX:DOL).
CSU, DOL, and XIU Total Return Level data by YCharts
How did Constellation Software do from the last market correction?
Since the pandemic market crash bottom, Constellation Software stock has returned close to 170%, which is clearly an outperformer of the market. Notably, at the market crash bottom, the top tech stock traded at about $1,078 per share or a price-to-earnings ratio (P/E) of roughly 30, which didn’t seem cheap.
However, the company has a track record of delivering long-term above-average growth. Indeed, it has continued with a double-digit earnings growth rate since 2020, which has driven the stock higher. From 2020 to 2022, the stock increased its adjusted earnings per share by 30%.
Today, at about $3,241 per share, analysts believe the stock is fairly valued. Investors who have a long-term investment horizon can consider buying partial shares in the stock through a trading platform like Wealthsimple.
How did Dollarama do from the last market correction?
Dollarama stock has returned close to 157% since the pandemic market crash bottom. So, like Constellation Software, it also outperformed the market. At the market crash bottom, the defensive discount retailer traded at about $37 per share or a P/E of roughly 20.7, which was a good valuation for the growth potential that it offered.
In fact, from fiscal 2021 to 2023, Dollarama increased its adjusted earnings per share by 52%. Its outsized earnings growth has resulted in a higher stock price. In a tougher economy with higher interest rates, Canadians continue to find value in shopping at Dollarama for its wide selection of products. At $99.72 per share at writing, analysts believe the stock is fairly valued.
It may be counter-intuitive for investors to buy more during a bearish turn and especially in low-yield high-multiple stocks that appear to be more expensive than the market. However, history shows that those could be some of the best stocks to buy in a bearish market.
