Folks, I have good news and “bad news”, depending on your perspective.
On the positive side, the benchmark S&P 500 (SNPINDEX: ^ GSPC) has seen a historic rebound from its March 2020 low. We are almost 20 months from the bear market trough during the early stages of the pandemic, and the S&P 500 has more than doubled in value.
The “bad” news is that the potential catalysts for a stock market crash or a sharp correction are multiplying.
Is a stock market crash looming on the horizon?
For example, last week we saw an eclipse of 40 for the S&P 500 Shiller price-to-earnings (P / E) ratio for only the second time in history. The Shiller P / E examines inflation-adjusted earnings over the past 10 years. While valuation alone is rarely the catalyst for a sharp correction or crash, it is worrying that following the previous four instances where the S&P 500’s Shiller P / E broke above 30, the index then lost at least 20% of its value.
It’s not just historical valuations that are of concern. Since 1960, there have been eight bear markets, not counting the coronavirus crash. After each of those eight bear market lows, there have been one or two declines of at least 10% in 36 months. What this tells us is that rebounding from a bear market is a process that takes time. Over the past 20 months, the S&P 500 has soared to the skies.
There are also more tangible concerns. October inflation readings showed a high of around 31 years for the rate at which the price of goods and services is rising. While it is perfectly normal for inflation to be present in a growing economy, high levels of inflation (6% +) threaten to reduce the purchasing power of consumers and businesses.
There was also a sharp increase in margin debt in 2021. Margin debt describes the amount of money borrowed with interest to buy or short sell securities. While we would expect the stock of margin debt to increase over time, it is not common for margin debt to increase by 60% or more in a single year, as has been the case more early this year. The only two times that have happened before, dating back to 1995, are just before the dot-com bubble burst and months before the financial crisis took hold.
Stock market crashes are an inevitable part of the investment cycle, and it is possible that it is brewing.
Accidents and abrupt corrections create opportunities for the patient
But like I said earlier, crashes and abrupt fixes are just bad news from your perspective. If you are a short term trader trying to synchronize the market, a sudden, steep drop in stocks can be quite painful. But if you invest in large companies for many years and let your investment thesis unfold over time, crashes and corrections are nothing more than opportunities to buy stocks at a discount.
In fact, one of the smartest things you can do in the event of a crash is to buy cutting edge innovative companies. Firms at the forefront of innovation tend to deflate more than the overall market in crashes, but can offer life-changing potential returns for patient investors. Here are three of those cutting edge stocks to buy in the event of a stock market crash.
The first innovative stock that would be perfect to buy during a crash or a fix is the cybersecurity company CrowdStrike Holdings (NASDAQ: CRWD).
The beauty of cybersecurity is that it has become a basic service for businesses of all sizes. In the wake of the pandemic, businesses are moving their data to the cloud at a rapid pace. Since bots and hackers don’t take a day off to try to collect data, more and more third-party vendors like CrowdStrike will be called upon to protect this information.
At the heart of CrowdStrike’s success is its cloud-native Falcon platform. Falcon relies on artificial intelligence to become smarter to recognize and respond to potential threats over time. Because it was built in the cloud, it is much more agile than on-premises security solutions and frankly better long-term value depending on the level of protection it can provide. On average, Falcon oversees around 1,000 billion events per day. In other words, a crash or fix will not stop the need for cybersecurity services.
If describing the effectiveness of Falcon isn’t right for you, maybe a quick glance at the company’s operational performance will do. In 4.5 years, the number of customers subscribed to CrowdStrike has grown from 450 to 13,000 in the north, the number of customers purchasing at least four cloud module subscriptions has increased from less than 10% to 66%, in the last trimester. CrowdStrike isn’t the cheapest cybersecurity option, but a retention rate of around 98% suggests businesses love it.
Planet 13 Holdings
When you think of marijuana stocks, the idea of cutting edge innovation may not come to mind. After all, we are talking about a plant. But the US multi-state operator (MSO) Planet 13 Holdings (OTC: PLNH.F) brings a level of innovation to the table in the pot industry that we haven’t seen yet.
Before we find out why Planet 13 is the perfect high-end action to buy during a crash, I think it’s important to tackle the elephant in the room: the lack of U.S. federal cannabis reform. While it would make life easier for MSOs if Capitol Hill legalized cannabis or reformed marijuana banking laws, the industry doesn’t need to thrive. To date, 36 states have legalized marijuana in some capacity.
What makes Planet 13 so special is the way it approached its expansion. Virtually all MSOs have planted their proverbial flags in as many potential billion dollar markets as possible. Meanwhile, Planet 13 only has two operating sites. The key is that Planet 13 focuses as much on the experience as it is on the sale.
Planet 13 SuperStore just west of the Las Vegas Strip in Nevada is bigger than average Walmart and has a cafe, event center and consumer processing center. Meanwhile, the Orange County SuperStore in Southern California spans 55,000 square feet with 16,500 square feet of retail space. Attracting local residents and tourists alike, Planet 13 is the best of both worlds when it comes to cannabis.
With the company on the verge of recurring profitability, any major weakness in the market would represent a buying opportunity.
A third cutting edge company just begging to be picked up in a crash or sharp correction is biotech action Novavax (NASDAQ: NVAX).
Even if Pfizer/BioNTech and Modern have won most of the praise for their 2019 coronavirus disease (COVID-19) vaccine development, Novavax looks set to be the third major player. In two large-scale clinical studies, NVX-CoV2373 generated vaccine efficacy (VE) of 89.7% (UK) and 90.4% (US and Mexico). Even though EV is just one of many key figures in the company’s clinical trial, an EV of 90% may be more than enough to overturn other less popular vaccine options.
The biggest problem for Novavax had been delays in filing an emergency use authorization in key markets, as well as a report that its vaccine purity standards were not meeting the target. These two challenges are being met. The company obtained its first global clearance (Indonesia) earlier this month, and it has filed the equivalent of the EUA in a number of other markets.
What could really differentiate Novavax from its competitors is its work on a combined COVID-19 / flu vaccine. The company’s drug development platform absolutely has the potential to deliver a vaccine that can treat two serious illnesses at once. If Novavax can beat the major drug manufacturers in the market with combination therapy, the sky is the limit.
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.Source link