3 obvious stocks to buy in the event of a stock market crash
Fn the past 19 months, Wall Street and investors have sat down and enjoyed the strongest rebound in history from a bear market. Since the wide base S&P 500 (SNPINDEX: ^ GSPC) hit on March 23, 2020, the index more than doubled in value. For context, the S&P 500 has averaged a total return, including dividends, just north of 11% since the start of 1980.
But at the same time, it is undeniable that the catalysts for a stock market crash or correction build.
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Crashes and fixes are inevitably part of the investment process
To be clear, we’ll never know in advance when a crash or correction will start, how long it will last, or how steep the drop will be. In many cases, we also don’t know what will drive the market down until after the fact. However, there are indications that this historic rally in equities may soon subside.
For example, the frequency of double-digit declines provides a warning. Over the past 71 years, the S&P 500 has fallen by at least 10% on 38 occasions. On average, we’re talking about a double-digit drop every 1.87 years. Even though Wall Street is off the averages, it’s worth pointing out that we are now more than a year and a half away from the latest double-digit drop.
The story is also pretty clear that rebounding from a bear market is a bumpy process. After each of the bear market’s previous lows, dating back to 1960, there have been one or two declines of at least 10% in 36 months. The current rally is now 19 months old and we have yet to see a double-digit pullback.
Assessment provides a caveat, too much. The S&P 500 Shiller price-to-earnings (P / E) ratio, which examines inflation-adjusted earnings over the past 10 years, stood at 38.5 at the close on October 19. In addition to being more than double the 151 year average. of 16.9, a sustained Shiller P / E above 30 has already caused problems. The four times the Shiller P / E exceeded 30 resulted in the S&P 500 subsequently falling by at least 20%.
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These stocks are obvious purchases in the event of a stock market crash
Despite these concerns and the inevitability of crashes and corrections, every noticeable drop in the market has historically been a buying opportunity. As long as the length of your investment is measured in years, not days or weeks, a stock market crash is nothing more than a liquidation sale for high quality companies.
If a crash or fix were to occur in the near future, the following three actions would make obvious purchases.
The first is the social media giant Facebook (NASDAQ: FB), whose growth has been relatively unruffled for more than a decade.
As the curtain closed in the second quarter, Facebook had 2.9 billion monthly active users (MAUs) visiting its namesake site, as well as 610 million unique MAUs visiting Instagram and / or WhatsApp, which it also owns. That’s MAU 3.51 billion, which is equivalent to more than half of the world’s adult population. Advertisers are well aware that there is no platform on the planet where they can reach a larger audience, and they are, therefore, going to spend a lot of money to get their message across to these users.
Aside from having exceptional ad pricing power, Facebook hasn’t even fully stepped on the accelerator when it comes to its growth potential. It is on track to generate over $ 100 billion in ad revenue this year alone from its namesake site and Instagram. Once WhatsApp and Facebook Messenger are monetized significantly, its potential for growth can change to another speed.
With the ambition to become a leader in virtual reality as well, Facebook offers the perfect blend of sustainable double-digit growth and value that investors looking for bargains during a crash will appreciate.
Image source: American Bank.
Another obvious stock to buy if market volatility increases is the regional bank US Bancorp (NYSE: USB). This is the more familiar American bank’s parent company.
Firstly, bank stocks are highly cyclical and therefore risk seeing their operational performance penalized by recessions or periods of heightened volatility. On the other hand, crashes, corrections, and recessions are all short-lived events.
The S&P 500’s average double-digit decline since 1950 has only lasted about six months. During this time, periods of economic expansion and bull markets often last for years. Bank stocks like US Bancorp are able to take advantage of these disproportionately long periods of expansion to expand their loan portfolios and generate more net interest income.
More specific to US Bancorp, he avoided the riskier derivative investments that laid off major central banks during the Great Recession and focused its efforts on the digital switchover. In the quarter ended September, the company notes that 80% of total transactions were done digitally (online or via mobile), up from 67% in the comparable quarter of 2019. Digital transactions are significantly cheaper. as interactions in person and over the phone. , which allows the company to consolidate its branches, reduce expenses and become more efficient.
Image source: Getty Images.
Among financial stocks, the payment facilitator MasterCard (NYSE: MA) is another buy without hesitation if there is a stock market crash.
Like US Bancorp, Mastercard enjoys disproportionately long periods of economic expansion. While recessions are inevitable and consumers will retain their disposable income during times of uncertainty, booms last much longer. Thus, Mastercard plays a numbers game which strongly favors the patient.
Mastercard is ranked No. 2 in volume of purchases on the credit card network in the United States, which is the largest consumer market in the world. It is also well configured to expand its infrastructure to underbanked regions, including Southeast Asia, the Middle East and Africa. With most global transactions still being made in cash, Mastercard opportunity for sustained double-digit growth is promising.
In addition, Mastercard strictly sticks to payment processing and does not lend money. While some would argue that it foregoes the ability to collect interest income and fees during long periods of economic expansion, this loan avoidance also ensures that it is not directly exposed to rising defaults. of credit during economic contractions. Not having to set aside capital for potential credit losses is precisely why Mastercard bounces faster than most downturns. financial stocks.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of its CEO, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. Sean williams owns shares of Facebook and Mastercard. The Motley Fool owns shares and recommends Facebook and Mastercard. The Motley Fool has a disclosure policy.
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