3 Bear Market Bargains? ARM Holdings plc, Burberry Group plc And NEXT plc

Warren Buffett famously said that one of the secrets to making big profits from stocks was to avoid losing money.

In today’s article I’ll highlight three companies I believe could help you to protect your capital and deliver decent profits in a bear market.


Shares in high street fashion favourite NEXT  (LSE: NXT) have fallen by 19% from £80 to £65 since the start of December. It seems to have been a victim of the general market sell-off and of concerns over slower sales growth. However, I suspect this sell-off may have been slightly overdone.

The shares now trade on 15 times forecast earnings and offer a prospective yield of 5.2% for 2015/16, including special dividends. The fall in the share price has also enabled NEXT to start buying back its own shares.

Unlike most firms, NEXT sets a maximum price for buying back its own shares. This is an approach also used by Warren Buffett and ensures cash isn’t wasted on buybacks when it could be used more profitably elsewhere. The current limit is £69.62.

The buyback policy has delivered stunning returns for shareholders. In my view, if NEXT is willing to buy its own shares, they may also offer good value for investors.

ARM Holdings

ARM Holdings (LSE: ARM) is getting steadily cheaper. The group’s P/E ratio has fallen steadily in recent years and the shares now trade on a forecast P/E of around 30. Although that might seem pricey, I think it’s justified considering that ARM’s earnings per share have risen by an average of 42% per year since 2009.

City forecasts indicate that ARM is expected to report earnings of 30p per share this year, a 66% rise in last year’s earnings of 18p per share. Earnings are expected to rise by another 14% in 2016, pushing the forecast P/E down to 27.

ARM is fantastically profitable, with an operating margin of about 40%. It also has a bulletproof balance sheet, with no debt and net cash of £690m. Although the 1% dividend yield isn’t very appealing, I believe ARM’s sales are likely to continue growing. In my view this is one of the safest stocks in the FTSE 100.


Will China’s stock market meltdown affect spending on luxury goods? There’s clearly a risk that it will, but the evidence so far is quite reassuring. In a trading update last week, Burberry Group (LSE: BRBY) said that Chinese sales returned to growth during the last quarter.

Upmarket spirits firm Rémy Cointreau also said this morning that Chinese sales had grown strongly during the last quarter. This suggests to me that the outlook for Burberry may be quite sound, especially as the stock is much cheaper than it used to be.

Burberry’s share price has fallen by 40% from the peak seen last February. The stock now trades at a level last seen in 2012. However, Burberry’s current sales and profits are around 35% higher than they were in 2012.

The group’s operating margin has averaged an impressive 18% since 2010, and Burberry has net cash and almost no debt. The shares currently have a 2015 forecast P/E of about 15 and offer a yield of 3.2%.

In my view, Burberry could be a smart buy, with decent downside protection and an attractive yield.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.