by   |   September 17, 2014   |   on

Pimco’s picks for this bear market

What exactly is a bear market?

Conventional definitions cite a bear market as being one in which stocks decline by 20% or more.

That begs the questions, which stocks? Are we talking about individual names, stocks in a sector, or an index? If an index, which index?

In many ways I think you could argue that we are in a bear market right now.

That’s right, a bear market right now. What else would you call it when 47% of the stocks on a particular exchange of import are down more than 20%?

I’d call it a frightening bear market. In this case we are talking about the Nasdaq being the exchange of import and yes, 47% of the stocks there are in bear market territory, according to Bloomberg.

What an oxymoron.

Here we have the Nasdaq after a decade and a half approaching historical highs and yet almost half the stocks on the exchange are stuck in the grip of the bear.

The big losers in a market that is becoming risk-averse are those with no earnings. Some 20% of the companies trading on Nasdaq will be unprofitable this quarter.

That’s why Pimco manager Mark Kiesel likes more established companies with superior growth in the midst of long-term secular growth.

Stocks with pricing power and high barriers to entry should outperform those companies on the edge of disaster with mounting operating losses.

It is not a time for a-wing-and-a-prayer investing. Only solid companies will do in this bear market.

Despite there being a relative dearth of opportunities in this market, Kiesel sees plenty of good stocks to choose from.

In the energy sector, clearly in a secular long-term growth trend, Kiesel likes Cheniere Energy (NYSE: LNG). Cheniere is expected to export some 5% of the U.S. gas supply over the next four to five years. That sort of growth and over the long term provides security for investors today.

The same potential is true in the fracking business. A company like Targa Resources (NYSE: TRGP) is growing by 20% to 30% per year and will do so for the foreseeable future, making it an attractive stock, according to Kiesel.

For pure power of cash flow and solid revenue growth, Kiesel likes Verizon (NYSE: VZ). With over 100 million subscribers, this company is going to be around for a long time, making it a favorite play with equity and bond holders.

Another exciting space is lodging. Kiesel sees the return of the business traveler in a more stable economic environment as bullish for the space. Names he likes include Starwood Hotels & Resorts (NYSE: HOT) and Wynn Resorts (NASDAQ: WYNN).

Don’t be discouraged by nearly half of all Nasdaq stocks trading in bear market territory. There are still gains to be had with stocks like those favored by Pimco’s Kiesel.

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