Stocks tumbled into a bear market earlier this year, enduring their worst first half in decades. While they've recovered from their lows, most investors aren't yet convinced that this challenging market is in the rearview mirror.
With that in mind, we asked a couple of our contributors to make a case for buying Raytheon (RTX -0.28%) and Energy Transfer (ET 0.10%) during a bear market. Here's why they like these two companies.
The case for Raytheon
Lou Whiteman (Raytheon): The 2019 combination of the aerospace arm of United Technologies and defense-contractor Raytheon was billed as a way for both sets of investors to diversify. The deal blended UTX's commercial-aviation-focused portfolio with Raytheon's military muscle.
That diversification came in handy less than a year after the deal closed. The pandemic caused commercial aviation to grind to a halt, and the newly combined Raytheon Technologies would have suffered without Raytheon's government contracts to fall back on.
More recently, it's been the commercial-aviation side doing the heavy lifting. Raytheon Technologies beat analyst expectations in its most recent quarter, thanks to strong demand for airplane and engine parts. The company expects sales at its Pratt & Whitney engine unit and Collins aircraft-interiors divisions to grow by 20% to 25% for the year.
Looking ahead, the commercial business should benefit from an aviation industry expected to grow by 3% to 4% annually over the next 20 years. Raytheon should also see demand for its missiles and missile-defense systems surge in the months to come as the U.S. and its allies look to replenish stocks depleted by the war in Ukraine.
With Raytheon Technologies, investors get the opportunity to buy into a company with exposure to a range of different customers, including the Pentagon, one of the most reliable bill payers during a recession.
Today, Raytheon Technologies trades at just 19 times expected earnings and two times forecasted sales, and pays a dividend that yields more than 2%. The stock is a calm harbor in a tumultuous market with the potential for upside in both its military and commercial-aviation businesses. It deserves a place as a foundational stock in either a growth-oriented or income-focused portfolio.
The case for Energy Transfer
Matt DiLallo (Energy Transfer): Energy Transfer provides a lot of ballast to a portfolio during a bear market because it has a very resilient business model. Between 85% to 90% of the pipeline-giant's earnings come from stable fee-based contracts and other regulated rate structures. Because of that, it produces a relatively steady income stream, no matter the market environment.
That allows the master limited partnership (MLP) to pay an attractive dividend. It currently yields around 8%, even though the company pays out less than half of its cash flow to investors each quarter. That big-time income stream provides investors with a very tangible return during bear markets. They can use that money to buy other stocks as prices fall.
Meanwhile, Energy Transfer uses the money it retains to strengthen its balance sheet and expand its midstream operations. The company's excess cash after paying distributions rose 19% in the second quarter to $1.2 billion. It used those funds to acquire Woodford Express, finance several expansion projects, and pay off additional debt.
Those expansion-related investments should help Energy Transfer to continue growing its cash flow in the future. That would give the MLP additional fuel to increase its already high-yielding distribution, especially since its balance sheet is steadily growing stronger.
Energy Transfer's stability makes it an ideal investment in a bear market. Its earnings should keep growing, enabling it to continue making lucrative distribution payments. Those cash returns can help mute some of the market's volatility, making a downturn more bearable.
A safe harbor or income and stability
Raytheon and Energy Transfer are both more defensive stocks, making them ideal bear market investments. The big difference is that Energy Transfer offers a much higher income stream, while Raytheon has more growth potential. Because of that, Energy Transfer is likely a better option for income-focused investors, while Raytheon would probably be more appealing to growth-minded investors.
