If a Bear Market Is Coming, These Are the 2 Stocks to Avoid -- and the 1 to Own

It's been quite a ride for investors this year. After an early sell-off, the S&P 500 is up about 21% from its low in March, while the tech-heavy Nasdaq Composite is once again setting records, topping 27,200 just last week.

But a lot is happening all at once. With global instability, elevated oil prices, and bond yields at nearly two-decade highs, some investors are nervous that the recent run will reverse.

If that happens, and a bear market -- a 20% drop in the stock market -- comes, I think a major slowdown in AI spending will play a key part. Here are two stocks I think will fall much further, and one that will fare far better than most.

On the surface, Oracle (ORCL +0.56%) looks incredible. Sales for its Oracle Cloud Infrastructure (OCI) arm -- the part building and leasing huge AI data centers -- jumped 121% to $7.4 billion in its most recent quarter. The company's remaining performance obligations (RPO) -- contracted revenue for services it hasn't delivered yet -- reached an incredible $664 billion.

But nothing is free, especially in the data center business. Oracle has to actually build the capacity to deliver on those contracts, and that takes a whole lot of cash. Oracle's free cash flow (FCF), the money left over after running the business and paying for things like construction and hardware, was negative $5.4 billion in the latest quarter.

That's a serious shortfall, and it comes even after a program of cost-cutting and significant layoffs.

To fund the difference, Oracle has turned to the debt market. At the end of August, it had $125 billion in long-term debt, plus $288 billion in data-center lease commitments that had not yet begun and aren't yet on its balance sheet.

Oracle is currently spending $1.4 billion every quarter on interest alone. The cash it earns from its operations is $23.1 billion.

While its mix of customers has expanded, Oracle is heavily dependent on a single customer that is, in turn, in a tenuous financial position: OpenAI. The ChatGPT maker is committed to spending $300 billion during the next five years, and as of its latest leaked financials, it had a loss of $12.3 billion last quarter.

That means a serious portion of Oracle's RPO relies on a company that could have trouble paying.

CoreWeave's (CRWV +1.66%) issues mirror Oracle's. The difference is in scale, and the fact that if providing AI compute doesn't turn out to be fabulously lucrative, Oracle still has a $24.5 billion software business (and a $15.9 billion cloud applications business). CoreWeave does not.

The company is a neocloud, and its entire model -- renting out Nvidia chips to AI customers -- relies on AI to continue booming. If AI demand slips, the company could be in serious trouble.

Of course, CoreWeave's top-line growth is incredible. Just look at the chart below.

CRWV Revenue (TTM) data by YCharts.

Just as with Oracle, I'm wary of what that growth costs. CoreWeave had $35.6 billion in total debt at the end of June against just $5.5 billion in cash. Interest expense alone was $640 million for the quarter, and just recently, it completed another $4.2 billion convertible debt offering.

Berkshire Hathaway (BRKB +0.51%) (BRKA +0.64%) is absolutely a stock I'd want if things turn south.

Even after the recent departure of legendary Chief Executive Officer Warren Buffett, Berkshire is built to handle major market turmoil -- and profit from it. Berkshire had about $365 billion in cash and U.S. Treasury bills at the end of June. That's capital it can deploy during a market decline, buying good companies at a discount -- exactly what it did during the 2007-2009 financial crisis.

To be fair, the relatively defensive nature of Berkshire has a cost: The stock usually lags behind the market during major rallies. However, the reverse is true during major sell-offs.