Buy Industry Leaders in a Bear Market, Unless the Second-Best Company Is Cheaper

A bear market is a great time to build a position in industry-leading companies. A market selloff that sends great companies down can lead to improved returns in the future.

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  • Those returns could be even better buying companies that aren’t the top name in the industry. The second-best company in the space will likely get hit a little bit harder in a market downtrend. But it may see higher returns when the market turns around.

    Right now, that’s playing out with home improvement retailers. Lowe’s (LOW) is getting a cut on analyst expectations. But shares already trade at 16 times earnings, a notable discount to the 19 times earnings that investors are paying for Home Depot (HD).

    Action to take: Both companies look attractive in a bear market. With a lower valuation, Lowe’s looks attractive here. The home improvement retailer yields about 2.1 percent right now, a slightly lower payout than its major competitor. But on a market rebound, shares could perform better from here.

    For traders, the January $220 calls, last going for about $10.25, offer mid-double-digit returns in the months ahead. As with any trade right now, look for a down day in shares to buy, and don’t hesitate to sell after a strong rally day for the stock.

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    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.