Investors might not like what I’m about to say, but it’s a compelling truth: Stock market crashes are inevitable.
For many, the prospect of a double-digit percentage decline in S&P 500 (SNPINDEX: ^ GSPC) is baffling, especially considering how quickly a bearish momentum can develop in the market. But depending on your investment schedule, a crash or abrupt correction can represent an incredible opportunity for wealth building.
Crashes and fixes are inevitably part of the investment cycle
For now, catalysts are forming which suggest that a significant drop could wait. Historically, there have been 38 double-digit percentage declines in the S&P 500 in the past 71 years. That’s a decrease of 10% or more, on average, every 1.87 years. Even if the stock market does not follow the averages, it shows how common it is for stocks to deflate. For context, it’s been about 1.67 years since the S&P 500 bottomed out during the pandemic.
On a related note, bouncing off the previous eight bear market lows has proven to be a process. Each of these rallies from a bear market trough exhibited one or two declines of at least 10% in 36 months. We are now more than 20 months from the bottom without a single double-digit percentage decline.
Evaluation is also a major concern. On Monday, November 22, the Shiller price / earnings (P / E) ratio of the S&P 500 stood at 39.5. The Shiller P / E takes into account inflation-adjusted earnings over the past 10 years. Aside from that reading being more than double the 151-year average P / E of 16.89, the previous four instances where the S&P 500’s P / E Shiller exceeded 30 resulted in subsequent declines of at least 20% in the index.
We have also seen a sharp increase in margin debt over the past year. Since 1995, there have been only three instances where capital borrowing to buy or short sell stocks increased by 60% or more in any given year: just before the dot-com bubble burst, just months before the financial crisis, and earlier this year.
Suffice it to say that there are more than enough catalysts to suggest that a stock market crash or sharp correction is brewing.
Crashes are a sure-fire buying opportunity
But as I noted earlier, your investing style has a lot to do with how devastating these potentially sudden downward moves in the market can be. If you are a relatively short-term trader, a crash or correction can be quite expensive. But if you are prepared to see your investment thesis unfold over many years, a stock market crash or sharp correction has historically been a buying opportunity.
If a stock market crash materializes, the next three winning stocks would be ripe for picking.
The first winning stock that long-term investors can confidently add to a significant pullback in the broader market is the payment processing giant. MasterCard (NYSE: MA).
While all table games in a casino favor the house, long term betting on Mastercard strongly favors the patient. While recessions and stock market crashes are events that cannot be stopped, none of these events tend to last very long. Most recessions unfold over a few months or quarters. By comparison, periods of economic expansion are almost always measured in years.
So any short-term pain that Mastercard faces due to a recession or stock market crash tends to be put in the rearview mirror by long periods of economic expansion where consumers and businesses are spending more.
Mastercard also happens to be a major player in the world’s No. 1 consumer market, the United States. With around 22% of the credit card network’s purchasing volume, as of 2018 it slips as the second player. Additionally, with most of the world’s transactions still being done in cash, Mastercard has a decades-long opportunity to expand its infrastructure to underbanked regions of the world.
Additionally, the company’s success stems from its focus on transformation. While you might think Mastercard would like to take advantage of interest-earning opportunities, it is not a lender. The advantage of loan avoidance is that the business does not have to set aside capital to cover credit defaults that arise during economic downturns. It’s Mastercard’s secret to maintaining a profit margin of over 40%.
Bristol Myers Squibb
Another sure-fire winning stock that investors can gobble up during a crash or correction is the pharmaceutical company Bristol Myers Squibb (NYSE: BMY).
The beauty of most health care stocks is that they are very defensive. No matter how well the economy or the stock market performs, it doesn’t stop people from getting sick and needing medicines, devices, and health care services. Bristol Myers certainly fits the mold of this definition as a supplier of brand name drugs.
The company has done an admirable job of developing therapies internally and with the collaboration of others. For example, cancer immunotherapy Opdivo reported sales of around $ 7 billion last year and is currently being screened in dozens of ongoing clinical trials as monotherapy or in combination. If even some of these studies prove successful, the label’s expansion opportunities could push Opdivo north of the $ 10 billion in eventual maximum annual sales.
Bristol Myers Squibb is also benefiting from its cash and stock agreement to acquire cancer and immunology drug maker Celgene in November 2019. The price of this deal is Revlimid, a multiple myeloma drug, which is expected to reach 13 billion dollars in a full year. Sales. Label extensions, high pricing power, and longer shelf life have helped Revlimid grow sales by a double-digit annual percentage for over a decade. And don’t forget that Celgene also had around 30 partnerships in cancer and immunology at the time of its acquisition.
With Bristol Myers Squibb already deeply in value at around seven times Wall Street’s annual earnings per share, this would be the perfect buy for patient investors in the event of a crash.
A sure-fire third winning title to buy hand over fist if there is a stock market crash or steep correction is the e-commerce giant Amazon (NASDAQ: AMZN).
Most people are probably very familiar with Amazon’s totally dominant online marketplace. Amazon’s marketplace is expected to handle 41.4% of all online orders in the United States this year, according to eMarketer. In one context, the closest competitor holds around 7% of online sales in the United States.
Admittedly, the margins for online sales are not that good. To compensate for these very slim margins and to encourage users to stay loyal and active, Amazon signed up 200 million people for a Prime membership. Fees collected from Prime members bolster the company’s margins and help lower prices from traditional retailers.
But the real key to growing Amazon’s operating cash flow isn’t online retailing. Rather, it is the Amazon Web Services (AWS) cloud infrastructure segment, along with other high-margin revenue channels, such as advertising and subscription services. As of September, AWS accounted for 62% of the company’s $ 21.4 billion in operating revenue in 2021, although it only achieved 13% of total sales. Amazon’s higher margins from its faster growing segments (AWS, advertising, and subscription services) are expected to help more than double its operating cash flow by the middle of the decade.
Amazon could well be the world’s largest publicly traded company by 2025, making it an obvious buy in the event of a crash or fix.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.