KEY POINTS
- Investors can hedge a bear market by owning shares in strategic companies.
- Right now, industrial real estate, data infrastructure, and communications are booming.
- Prologis and American Tower, two leaders in these markets, are no-brainer buys.
These stocks offer investors a hedge in a down market in booming industries.
As the stock market teeters in and out of market correction territory, investors are concerned over where the market could be headed. While most investors are rooting for a bull market, market corrections and bear markets are a natural part of the market cycle and shouldn't necessarily be feared.
The goal, rather, is to have strategic exposure to high-quality stocks that can withstand the market pressure and even provide a hedge against stocks that may not be performing favorably. Here's a closer look at why American Tower ( AMT 0.04% ) and Prologis ( PLD -0.01% ) are two no-brainer stocks to own in a bear market.
Image source: Getty Images.
American Tower
Data and communications infrastructure is becoming an increasingly important aspect of our lives as we become more reliant on virtual technology, wireless solutions, and cloud-based services. Investors can look to data center REITs (real estate investment trusts) to provide exposure to this growing need for safely storing and computing data.
American Tower offers investors exposure to both communications infrastructure and data center storage solutions. Not to mention it is the second-largest REIT by market capitalization and the largest operator of communications towers and communications infrastructure in the world, having over 220,000 sites and putting it in a league above the rest.
NYSE: AMT
Some investors worry about American Tower's long-term growth prospects. After all, being huge does have challenges when it comes to growth, but the continued adoption of 5g technology and expansion in international markets is helping boost company performance. In 2021, revenue increased 16.4% while net operating income (NOI) jumped 51%. Funds from operations (FFO) -- a measure used to evaluate a REIT profitability similarly to earnings per share -- grew 15.4%.
Now, the company has the opportunity for even further growth after adding 33 data centers to its portfolio in 2021. This included the CoreSite deal and other acquisitions which cost the company $20.8 billion in total. Its ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is 6.8 -- higher than the industry standard of 5 -- but given its recent acquisition efforts, the debt should give a notable boost in revenue and isn't a huge cause for concern.
Prologis
Industrial real estate is one of the hottest commercial real estate sectors right now, reaching record levels for demand, deliveries, and rent growth in 2021. In the fourth quarter of 2021, data shared by CBRE Group ( CBRE 1.84% ) revealed the average vacancy rate for industrial space was 3.2% -- a new low with some markets seeing vacancy rates below 2%. Lack of supply and ferocious demand is driven largely by international supply-chain disruptions, and the rise of e-commerce has pushed rental rates up $9.10 per square foot on average, or 11% over the past year.
NYSE: PLD
This puts Prologis, the premier industrial REIT as well as the largest REIT by market capitalization, in an ideal position to profit even in a bear market. The company, which has interest and ownership in over 1 billion square feet of warehouses and distribution centers across 4,700 properties around the globe, had an impressive 97.4% occupancy in Q4 2021. Revenue, funds from operations (FFO), and net operating income all rose steadily from 2020 to 2021, and demand for industrial space isn't slowing.
Prologis is also in a strong financial position as well with debt at 4.2 times EBITDA, which is considered low by most REIT standards. That company also recently bumped up its dividend payments by 25%. While the dividend yield is still low, at around 2%, it's a reliable company that is well-positioned to weather a down market.
Resilient buys for a bear market
Both of these companies are leaders within their respective industries and reliable dividend payers. Despite their massive size, both hold opportunities for growth while providing exposure to recession-resistant industries backed by long-term demand. While these companies' business models may perform admirably during a bear market, it's important to remember they aren't immune to market volatility.
American Tower and Prologis share prices are down 17% and 3%, respectively, year to date. Investors need to be patient and trust that their business models and performance will be able to withstand a tough market. While things may temporarily dip, over the long term these two stocks are clear winners.
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