Is This a New Bull Market? 3 Stocks the Smartest Investors Are Watching.

The market’s been a bit wobbly lately. Higher interest rates continue to crimp demand for growth-generating loans. Meanwhile, corporate earnings haven’t exactly been stellar. The price pullback that stocks have suffered through since the end of July can’t come as a complete surprise.

Taking a medium-term look at the situation, the rebound effort that got underway last October is still technically intact, and a handful of economic bright spots are still in place. Unemployment, for instance, remains near record lows. And consumer spending has slowed a bit but is still growing. While the next bull market is not officially here, there is still a general attitude that it’s right around the corner.

Here’s a closer look at three stocks smart investors are watching closely right now, as they offer superior risk-adjusted upside potential if we’re at the onset of a new bull market.

1. Charles Schwab

You know the company. You may even be a client. Charles Schwab (SCHW 0.40%) is one of the U.S.’s biggest brokerage firms, boasting on the order of $8 trillion worth of customer assets under management.

The stock’s not been a great performer recently, and understandably so. It’s a bank, and like so many other banks, in March it was swept lower on fears that it was at risk of a liquidity crisis like the one that ultimately caused SVB Financial‘s Silicon Valley Bank’s collapse. While those fears ended up being overblown, last quarter’s revenue and net income were down 9% and 25% year over year, respectively. Schwab thrives on economic strength that promotes interest in investing, but it seemingly struggles when investors are content to remain on the sidelines and the market’s stuck in neutral.

If a rekindled bull market is in the cards, though, then Charles Schwab is already perfectly positioned to plug into it. As CEO Walt Bettinger explained of the company’s second-quarter results:

During the second quarter, we gathered $52 billion in core net new assets — bringing year-to-date asset gathering to over $180 billion and keeping us squarely within our long-term organic growth range of 5%-7%. While we observed signs of typical tax seasonality, as well as softer investor sentiment at the beginning of the quarter, we still attracted nearly 1 million new brokerage accounts and finished the period serving $8.02 trillion in total client assets across 34 million accounts.

Simply bringing this money under Schwab’s umbrella has tremendous bullish implications.

Asset management and administration fees account for roughly one-fourth of Schwab’s top line, and these fees are generated regardless of how the stock market is performing. Meanwhile, net interest income reliably makes up on the order of half of its revenue. This money is produced in almost any interest rate environment as well. Trading revenue, conversely, only accounts for around one-fifth of the brokerage firm’s business.

Connect the dots. Even if the market isn’t roaring and rates aren’t soaring, its biggest profit centers are surprisingly consistent from one quarter to the next.

Of course, bull markets still spur growth for all of Charles Schwab’s key business lines.

2. Adobe

You’ve probably at least heard of Adobe‘s (ADBE 0.21%) popular digital photo editing software Photoshop, and you’re likely an occasional user of its PDF file reading and editing platform Acrobat. What you may not realize is how these products are sold, and what else Adobe is doing these days.

Photoshop is still one of the go-to software solutions for professionals needing to create, improve, or enhance digital images. It doesn’t sell boxed or downloaded versions of the software nearly as often as it used to, though. Rather, it rents cloud-based access to these tools. It’s not only more convenient to users but ultimately more affordable for long-term customers who perpetually need up-to-date versions of these programs.

Adobe’s a growing name in the digital data management space too. Its Experience Cloud platform helps companies gather information about consumers’ interaction with a particular website, for instance, and then do something constructive with it. Like the online version of Photoshop, access to these cloud-based programs is paid for on an affordable monthly basis.

That’s an important distinction. Once organizations start paying for ongoing access to such business tools, they often become critical to everyday business functions. It’s difficult to simply cut off access to these programs as a means of culling costs.

As of the end of last quarter, Adobe’s annualized recurring revenue stood at $14.14 billion. That’s not only up from the year-earlier comparison of nearly $13 billion, but nearing Adobe’s 2022 total top line of $17.6 billion.

The numbers say customers increasingly want to enter into a perpetual relationship with the company despite economic headwinds. The economic tailwinds that typically accompany a new bull market should only accelerate Adobe’s existing growth of this recurring revenue base.

3. STAG Industrial

Last but not least, add STAG Industrial (STAG 0.40%) to your list of stocks smart investors realize could outright thrive in a bull market.

Unlike Adobe and Charles Schwab, STAG Industrial isn’t exactly a household name. There’s a good chance you or someone in your household regularly benefits from its business, however. STAG Industrial is a real estate investment trust (or REIT), acting as landlord to warehouse-oriented and shipping-centric tenants like FedEx, Tempur Sealy, and most notably, Amazon. If the market is moving higher, it’s most likely rooted in the same growth that not only raises STAG’s pricing power, but offers it the opportunity for growth via expansion.

And the company’s gotten very, very good at figuring which properties to buy, and how to make them more marketable. When the REIT went public in 2011, it only owned 14.2 million square feet of rentable space. Now it owns 111.1 million square feet of industrial property, with 97.7% of it being rented as the end of June despite the uncertain economic environment. It’s also turning more of its rent payments into profits than it was a year ago.

That’s perhaps the most important detail for current and would-be shareholders. REITs are given preferential tax treatment. Whereas publicly traded companies’ profits are taxed before any of that income is passed along to investors in the form of dividends, REITs generally aren’t subject to the same rules. In most cases, REITs that pass at least 90% of their earnings along to shareholders aren’t required to pay any tax on that portion of their profits.

Investors must still pay taxes on these dividends, to be clear. Even so, these investors are generally collecting bigger dividend payments because the bulk of a REIT’s bottom line isn’t taxed first.

As of the most recent look, STAG Industrial’s dividend yield is a healthy 4%.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe,, FedEx, and Stag Industrial. The Motley Fool recommends Charles Schwab and recommends the following options: long January 2024 $420 calls on Adobe, short January 2024 $430 calls on Adobe, and short September 2023 $47.50 puts on Charles Schwab. The Motley Fool has a disclosure policy.

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