It can feel a bit scary when the stock market takes a tumble. We see those red arrows and hear talk of a “bear market,” and it’s natural to want to hide our money under the mattress. However, for those with a bit of patience and a long-term view, these downturns can actually present some interesting opportunities. The strategy we’re going to chat about today is called “buying the dip.” This simply means purchasing shares of good companies after a stock price has declined.
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What to watch
Now, it’s important to remember that the stock market can be unpredictable. There are no guarantees that a stock that has gone down will suddenly shoot back up. That’s why doing your homework is absolutely crucial. You wouldn’t buy a new appliance without reading some reviews, would you? The same principle applies to investing.
So, how do we find these potential “bear market bargains” on the TSX? First, we need to focus on companies that have a solid track record. These are businesses that have been around for a while, have a good reputation, and have shown they can make money even when the economy isn’t booming. Think of companies that provide essential services or products that people need no matter what.
Next, we need to look at why a particular stock’s price has dropped in a bear market. Sometimes, the entire market goes down due to broader economic concerns, even if a specific company is still doing well. This can create a temporary dip in the price of a good stock, presenting a buying opportunity. However, if a stock has fallen because the company itself is facing serious problems, like declining sales or increasing debt, then it might be best to steer clear.
A stock to watch
Let’s consider a real-world example. Look at Bank of Montreal (TSX: BMO) as the overall stock market experiences a downturn due to worries about inflation. As a result, the price of BMO’s stock might also decrease, even if the bank’s recent earnings report showed steady profits and a strong loan portfolio. In this scenario, the dip in BMO’s stock price might represent a chance to buy shares of a solid company at a more attractive valuation.
As of writing, Bank of Montreal has a market capitalization of approximately $75 billion. Its most recent earnings report indicated a net income of $1.29 billion for the fiscal first quarter of 2025, reflecting consistent performance despite economic headwinds. The stock price has seen a temporary decline of around 8% over the past month, largely in response to broader market concerns rather than company-specific issues.
Of course, it’s vital to dig a little deeper. Take a look at the bank’s price-to-earnings (P/E) ratio, which compares the current share price to its earnings per share. A lower P/E might suggest the stock is undervalued relative to its earnings potential. Also, consider the dividend yield. Many Canadian financial institutions, including BMO, pay attractive and reliable dividends. Due to the recent drop in share price, BMO’s dividend yield now sits around 5.3%, and its P/E ratio is about 11.2, making it look even more appealing to income-focused investors.
Before you jump in
Trying to time the market perfectly is nearly impossible. Instead of attempting to buy at the exact bottom, consider buying in stages using dollar-cost averaging. By investing a fixed amount at regular intervals, you naturally buy more shares when the price is low and fewer when it’s high, smoothing out your average cost over time.
As well, remember to diversify. Even if BMO looks like a great opportunity, don’t concentrate your portfolio on one stock or sector. Spreading your investments across various industries helps to reduce overall risk.
Bottom line
Buying the dip in a bear market isn’t about getting rich quickly. It’s a long-term strategy that calls for research, patience, and discipline. By focusing on quality Canadian companies like BMO that temporarily dip in price due to market-wide pressures, you might uncover valuable opportunities for growth and income. Always consider your financial goals and speak to a qualified advisor if you’re unsure.
