Could this bear market be a once-in-a-generation opportunity?

With stocks officially in bear market territory, could this be a once-in-a-generation opportunity for our author to buy quality businesses at great prices?

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Key Points

  • A bear market is when prices decline by 20% or more for an extended period
  • Billionaire investor Ron Baron thinks this might be a once-in-a-generation opportunity for investors
  • I think markets might decline further, but there are investment opportunities that I think are attractive at the moment

It’s official – stocks are in a bear market. Billionaire investor Ron Baron said last week that this is the kind of opportunity for investors that only comes around once in a generation.

Is he right? And if so, what should I do?

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Bear markets

By definition, a bear market occurs when stocks fall by 20% or more for an extended period of time. Statistically, bear markets happen roughly every four years.

This means that I’m likely to see a few bear markets during my investing career. But Baron has three reasons for thinking that this might be the investing opportunity of a lifetime.

First, stocks are trading at cheap prices. Second, corporate earnings are growing strongly. Third, businesses are producing stronger returns on fixed assets.

Great businesses at bargain prices

From my perspective, a lot of this rings true. There are some businesses that I think very highly of that are trading at valuations that seem attractive to me.

One of the best examples of this is Google  (NASDAQ:GOOG). This is a stock that, as far as I can tell, meets all three of Baron’s criteria. 

Google shares currently trade at a P/E ratio of around 19. Over the last five years, the stock has traded at an average P/E ratio of around 25.

Normally, I wouldn’t value a business just using its P/E ratio. But for a company like Google, which has extremely low debt, I think that the P/E ratio is informative.

The company has also been growing its earnings strongly and is forecast to continue to do so. Analyst forecasts for the next five years anticipate earnings growing at around 15%. Of course, forecasts can change based on future developments.

Google is also the kind of asset-light business that Baron has in mind. With no factories, manufacturing plants, or shops, the company generates $82bn in operating income using $110.5bn in fixed assets.

Risk

Google is a really good example of a stock that’s fallen into buying territory for me. The share price has come down by around 12% over the last year.

But the stock hasn’t fallen for no reason. There’s investment risk associated with Google shares and that’s been weighing on the share price.

The main risk, in my view, is the possibility of a recession impacting Google’s business. If its earnings fall (or even if they grow more slowly than expected) then its P/E is likely to increase.

That will make the stock look expensive. In response, I think that the price might fall.

Conclusion: a once-in-a-generation-opportunity?

I’m not convinced that this bear market is a once-in-a-generation opportunity for investors like me. I think that markets might have further to fall, especially if a recession hits corporate earnings.

Nonetheless, I do think that there are some great companies trading at attractive valuations at the moment. Google is one example that I’ve been buying for my portfolio.

For me, the key question isn’t whether share prices will be lower at any time in the future. I don’t think I can accurately predict where the stock market will go from here.

The question for me is whether share prices are low enough right now for the business to provide me with a decent return. And in a number of cases – most notably Google – I think they are.

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