3 Stocks to Buy If You Think There's a Bull Market Coming

Stocks have been in a bear market since early last year. The culprit is the concern that raising interest rates to combat inflation will slow the economy. That would affect the growth prospects of many companies. 

However, because the economy is cyclical, a recovery will eventually occur, setting off a new bull market. Three stocks that would benefit if a bull market started soon are NextEra Energy (NEE 0.50%), A. O. Smith (AOS -0.71%), and 3M (MMM 0.88%). Here’s why a few Fool.com contributors think a bull market could be a big catalyst for their share prices. 

A sentiment shift could put a charge in this stock

Matt DiLallo (NextEra Energy): Investors tend to focus on the negatives during bear markets. Because of that, they often sell shares at any hint of trouble. However, they usually take the opposite approach during a bull market, focusing almost entirely on a company’s upside potential.

NextEra Energy has been one of the many victims of the recent bear market in stocks. Shares have lost about 20% of their value from the market’s peak early last year. That sell-off has come even though the leading utility continues to grow fast. We saw that last month as its stock price tumbled despite posting strong earnings and extending its growth outlook for another year

A sentiment shift from bear to bull could help recharge this stock. Instead of focusing on the negatives, like its slowing growth in 2023, investors would see that the company expects to continue growing at an above-average rate through at least 2026. Furthermore, they’d realize that the recent passage of the Inflation Reduction Act could be a significant tailwind for the company’s clean energy business.

CEO John Ketchum called that landmark legislation “transformational for our industry and our business” on the fourth-quarter conference call. That’s because it gives clear incentives to invest in renewable energy technologies. “In short,” Ketchum stated, “we believe the IRA provides growth visibility for a broad range of low-cost, clean energy solutions in a predictable way and for a long time. We believe that in this environment, low-cost renewables will help NextEra Energy…continue to drive long-term value for our customers and our shareholders.”

A bull market should cause investors to shift their focus from the company’s near-term headwinds to the long-term tailwinds powering its growth. That could drive the stock to new heights.

Things are likely to get better

Reuben Gregg Brewer (A.O. Smith): There are two parts to A.O. Smith’s business. The larger one is its North American business, which is fairly stable over time because it is largely driven by the replacement of old water heaters. The foreign business is the other part of the story. It’s smaller (about 30% of sales) but has much higher growth potential.

In this business, emerging markets like China and India are seeing increased demand for water heaters as the residents of those countries move up the socioeconomic ladder. This makes sense — reliable hot water is an affordable luxury that everyone wants as soon as they can get it.

Lately, A.O. Smith has been facing some headwinds in North America because of inventory rebalancing. That’s a short-term problem that will sort out over time. China’s draconian response to the coronavirus has hurt sales in that country, which makes up the bulk of the industrial’s foreign business. That headwind is over, though, as China has reopened again.

India, a country A.O. Smith believes could be as important to its business as China someday, has been the only piece of the story holding up, with sales there growing 28% in 2022.

If North America moves past its inventory issues, China picks up again, and India just keeps humming along, investors will find A. O. Smith’s stock increasingly alluring. That’s particularly true if the business upturn coincides with a bull market. But here’s the interesting thing: The stock’s 1.75% dividend yield is still toward the high side of its range over the past decade, suggesting the shares are still at least reasonably priced.

This Dow stock could rebound with the market

Neha Chamaria (3M): Shares of conglomerate 3M have been battered over the past year, and the stock is still trading barely 5% off the 52-week lows it hit in August 2022. The company has faced several challenges, including but not limited to inflation, supply constraints, decelerating growth, and litigations, all of which combined to hit 3M’s operational numbers in recent quarters.

Yet, given the diversity of 3M’s end markets, the stock is also considered an economic bellwether that often acts as a leading indicator for several key sectors, including manufacturing. 3M is also a Dow stock, and the Dow Jones Industrial Average (DJINDICES: ^DJI) is a popular index to gauge the stock market’s performance. So if a bull market arrives, 3M could hit an inflection point as investors find value in the beaten-down stock.

In fact, 3M stock seems to have fallen too much already. The company’s sales fell only about 3% in 2022, and much of this was because of the negative effect of foreign currency translation. Yet, the stock is trading at multi-year lows right now.

Chart showing 3M's price and annual revenue falling in 2022.

MMM data by YCharts

3M’s operating margin also came in lower at 19% in 2022, but it wasn’t as jarring a drop as the market’s made it out to be. 3M’s operating margin was 20.8% in 2021. Most importantly, 3M still generated strong cash flows and increased its dividend for the 64th consecutive year in 2022. With the stock’s plunge driving its dividend yield up to 5.2% now, 3M looks like the kind of stock you’d want to buy if you see a bull market ahead and hold for the long term.