For investors, things couldn’t be better. The reference S&P 500 (SNPINDEX: ^ GSPC) has more than doubled since it hit its lowest level in the coronavirus pandemic on March 23, 2020, and so far it has gone through the entirety of 2021 without even a 5% correction.
Unfortunately, a number of historical metrics suggest that this rally is not sustainable and that a stock market crash or significant correction could be underway.
History may turn out to be hostile to the stock market in the short term
For example, even though the internet has democratized trading and helped increase price / earnings ratios over time, the current valuation multiple of the S&P 500 is nothing short of worrying.
At the end of August, the S&P 500 Shiller P / E ratio – which takes into account inflation-adjusted earnings over the past 10 years – was above 39. This is the highest level. for about two decades, and well over double the average Shiller P / E for the overall index going back 151 years. However, the bigger concern is that in the previous four instances where the Shiller P / E crossed and held 30, the S&P 500 subsequently lost at least 20% of its value. In other words, the precedent has been set that the S&P 500 is hit hard when valuations exceed historical norms.
There is also the fact that crashes and fixes are quite frequent. Data from market analysis firm Yardeni Research shows that there have been 38 double-digit declines in the S&P 500 since the early 1950s. Even though the market is not sticking to averages, we are talking about a double-digit decline, on average, every 1.87 years. Considering how quickly the market rebounded from its March 2020 low, it wouldn’t be surprising to see this average double-digit downside schedule focus.
A final prominent concern can be seen in the way stocks rebound from bear markets. In each of the eight bear markets before the coronavirus crash (dating from 1960), there were at least one, if not two, double-digit declines in the S&P 500 within three years of the trough. In other words, bouncing back from a bear market is a process and not the straight upward path we’ve seen in recent months.
A stock market crash would be your opportunity to pounce on these high quality stocks
But no matter what the stock market does in the short term, buying and owning stakes in large companies has long been a sure-fire way to build wealth. Since 1980, the S&P 500 has averaged an annualized total return of 11%, and that includes five bear markets.
If a stock market crash were to occur, this would represent the perfect opportunity to buy these three stocks hand in hand.
To be fair, there’s no bad time to pick up stock in the ecommerce giant. Amazon (NASDAQ: AMZN). But if you do manage to land shares in this very successful company at a reduced price during a crash or correction, you should jump at the chance.
Although retail is a highly competitive space, Amazon has captured the lion’s share of online retailing in the United States. According to an April report from eMarketer, Amazon’s market will steal about $ 0.40 of every $ 1 spent online in the United States this year. For a certain context, Walmart is number 2 in online retail and is expected to control $ 0.07 of every $ 1 spent online in 2021.
What’s been particularly valuable to Amazon is the ability to use its online dominance as a means to sign up 200 million people to Prime around the world. In general, the margins of the retailers are quite low. But adding tens of billions of dollars in annual subscription fees through Prime helps maintain those margins and ensures that Amazon continues to undermine its price competition.
While Amazon is best known for its online marketplace, it is actually the ancillary operations of the business that are critical to growing its cash flow. For example, Amazon Web Services is the world’s leading provider of cloud infrastructure. Since the margins associated with cloud infrastructure, advertising and subscription services are significantly higher than those of retail, they allow Amazon to more than double its operating cash flow from operations. here the middle of the decade.
Another smart way to jump in a stock market crash is to buy pet stocks, like a pet health insurance provider. Trupanion (NASDAQ: TRUP).
While the pet industry is not growing in leaps and bounds like cloud infrastructure, cybersecurity, or other innovation-driven trends, it is one of the most consistent growth trends in this country. U.S. spending on pets has increased year on year for at least a quarter of a century, and U.S. pet owners are expected to shell out nearly $ 110 billion in 2021 for their four-legged companions. No short-lived stock market crash will disrupt owners’ desire to keep their pets happy and healthy.
During the last quarter, Trupanion achieved an important milestone. It has surpassed 1 million pets enrolled in total, with more than 643,000 pets enrolled in its insurance underwriting segment. What’s particularly intriguing about this operating model is that Trupanion has only entered about 1% of the US pet market. If it achieved the UK market penetration rate of 25%, Trupanion’s addressable market would climb to almost $ 33 billion.
Additionally, Trupanion has built relationships with the veterinary community and clinics for two decades. Even with increased competition, these partnerships, along with the payment software that Trupanion provides to veterinary clinics, make it the clear leader in pet insurance.
A third stock to buy in the event of a crash or fix is a specialist biotech company Vertex Pharmaceutical (NASDAQ: VRTX).
One of the main aspects of health stocks is their defensive nature. Because we can’t choose when we get sick or what diseases we develop, there is a relatively stable demand for medicines, devices, and health services, regardless of how the economy (or the stock market) performs. .
What sets Vertex Pharmaceuticals apart is the company’s success in treating cystic fibrosis, a genetic disease characterized by thick mucus production that can clog the pancreas and lungs. Vertex has developed several generations of cystic fibrosis treatments, the latest of which targets a mutation affecting approximately 90% of cystic fibrosis patients. This combination therapy, Trikafta, was approved five months ahead of its scheduled review date by the U.S. Food and Drug Administration and is generating $ 5 billion in annual sales in less than two years on drugstore shelves. This source of CF revenue is well protected from competition.
Equally important, Vertex is sitting on a treasure chest of $ 6.71 billion in cash, cash equivalents and marketable securities. This capital is more than sufficient to finance the internal development of around ten compounds and could allow the company to make acquisitions. It’s not common for a biotech stock to be both a growth and a value stock, but that’s exactly what investors get with Vertex.
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! Challenging 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