The economy and stock market face a considerable set of challenges. For one, inflation is way too high which is leading the Federal Reserve to take an aggressive, hawkish posture which is a powerful headwind for global growth and financial assets. Remarkably, earnings and the labor market have continued to grow and expand despite this challenge, but history tells us that eventually, these will start showing signs of decay as well. 

Yet, from a technical perspective, we also have an indisputably bullish setup with a low-risk setup. The S&P 500 and other major averages undercut their mid-June low before embarking on a powerful, countertrend rally. We had a powerful bear market rally in March and from June to August that led to double-digit gains in the indices, and many opportunities for swing traders. 

It seems quite likely that a similar situation is developing at the moment especially as there is some progress in terms of leading indicators for inflation with the number of job openings declining, while rents are also showing signs of reversing. Both are necessary for inflation to decline. Finally, the current setup is also attractive, because traders can use Friday’s low as a stop-loss. Here are 3 stocks that could do well in a bear market rally scenario:

Sociedad Quimica Y Minera (SQM)

One tried and true strategy to outperform in bear markets is to identify stocks that are benefitting from secular trends. One of the most powerful secular trends at the moment is the increase in electrical vehicle (EV) production. According to analysts, EVs are expected to outsell gas-powered cars by the end of the decade.

Of course, this will lead to an increase in demand for key commodities like lithium, cobalt, and copper. SQM is a major producer of lithium and accounts for 13% of global production. It also produces a number of other commodities including iodine and potassium nitrate. Lithium accounts for 26% of its revenue and the majority of revenue growth. 

SQM’s stock is quite attractive from a technical and valuation basis. The stock is up 93% YTD, while the broad market is down more than 20%. Further, the company has a forward P/E of 7.3 which is half that of the S&P 500 despite a 4.7% dividend yield and 32% profit margins.

The POWR Ratings are also bullish on SQM as it’s rated a B which translates to a Buy. B-rated stocks have posted an average annual performance of 21.0% which compares favorably to the S&P 500’s annual 8.0% gain. Click here to see more of SQM’s POWR Ratings.

Vertex Pharmaceuticals (VRTX) 

VRTX discovers and develops small-molecule drugs for the treatment of serious diseases. Its key drugs are Kalydeco, Orkambi, Symdeko, and Trikafta for cystic fibrosis, where Vertex therapies remain the standard of care globally. The company also focuses on developing treatments for pain, type 1 diabetes, inflammatory diseases, influenza, and other rare diseases.

The company's cystic fibrosis drugs are poised to continue dominating the market for the foreseeable future due to the disease-modifying potential of the drugs, consistent use by patients, and very little competition. VRTX combination therapies also have lengthy patents, which protect its cystic fibrosis portfolio from generics. There is also potential for its non-cystic fibrosis pipeline, which has exposure to promising areas, such as AAT deficiency, sickle cell disease, and beta-thalassemia.

VRTX has an overall grade of A which equates to a strong Buy rating in the POWR Ratings service. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s average annual gain of 8.0%. 

VRTX also has strong component grades including an A for Quality due to 11 out of 19 analysts covering the stock having a Strong Buy rating with only 2 having a Sell rating. It’s also regarded as one of the top companies in the space due to its dominance of the CF market and a strong pipeline of potential, blockbuster treatments. Click here to see more of VRTX’s POWR Ratings.

Stride (LRN)

One commonality of the bull market winners of the past is that it was connected to secular growth themes. Another area of secular growth is homeschooling which is becoming increasingly popular due to a variety of political and unpolitical reasons. There is also chatter that vouchers could be used for homeschooling purposes.

LRN is probably the only stock that is connected to this theme as it offers an online platform for education, including hosting third-party material. Currently, about 2 million students are using Stride’s platform in one way or the other. Stride is also looking to bolster its product lineup by offering more career education services and also more third-party material. 

Stride is positioned as the leading company for anyone who is pursuing an education on their own initiative. This is going to be a promising area of growth, especially considering the egregious cost of a college education. And, Stride will get another tailwind from the increasing odds of Republicans winning control of Congress in 2022.

The POWR Ratings are also bullish on LRN as it’s rated a B which translates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual average gain of 8.0%. Click here to see more of LRN’s POWR Ratings. 

LRN shares . Year-to-date, LRN has gained 31.38%, versus a -19.69% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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