For more than 17 months, the benchmark S&P 500 (SNPINDEX: ^ GSPC) has been unstoppable. Since the trough of March 23, 2020, the widely followed index has more than doubled in value. This is the strongest recovery from a bearish bottom in the index’s rich history.
But whether this rally can last is a whole different story. If we look at history as a guide, it would suggest that there is an increasing chance of a double-digit percentage correction or crash on the horizon.
History may not be the friend of the market in the short term
For example, consider how the S&P 500 has performed in each of the previous rebounds from the bear market lows. In each of the previous eight bear markets (not counting the coronavirus crash), there have been one or two declines of at least 10% within three years of bottoming out. What this tells us is that getting out of uncertainty is a process that often takes time. We are now 17.5 months away from our rebound and have yet to see a double-digit drop in the S&P 500.
Crashes and fixes also tend to be very common. Data from market analysis firm Yardeni Research shows that there have been 38 double-digit percentages of the S&P 500 in the past 71 years. That’s an average decrease of 10% (or more) every 1.87 years. Even if the market does not respect the averages, it gives a fairly clear picture of the frequency of significant declines.
More concerning evidence can be found by looking at margin debt – the amount of money borrowed by investors to buy or short sell securities. Since the turn of the century, there have only been three instances where margin debt has increased by 60% or more in any given year. This happened just before the dot-com bubble burst, just before the Great Recession, and over the past two months. If short-term price movements work against investors and margin calls are triggered, it could accelerate a market decline.
Finally, history suggests that extended valuations are worrisome. Last week, the S&P 500 Shiller price-to-earnings (P / E) ratio closed above 39, which is near a two-decade high. The Shiller P / E takes into account inflation-adjusted earnings over the past 10 years. In each of the previous four instances where the Shiller P / E crossed and held 30, the S&P 500 subsequently fell by at least 20%.
While none of these points guarantee a crash or abrupt correction, they do imply an increasing probability of a significant recoil.
Every crash or fix is a buying opportunity
On the flip side, every crash or fix in history has turned out to be a buying opportunity. Each of the aforementioned 38 double-digit declines in the S&P 500 since 1950 have been erased by a bullish market rally. As long as your investment timeline is measured in years, crashes and corrections are a great time to buy unstoppable stocks at discount prices.
As someone who has more money now than at any time since I started investing over two decades ago, I would appreciate a crash or a fix. In particular, I want to buy or add to the following three unstoppable stocks in the next crash.
Although I already own a stake in the linchpin of e-commerce Amazon (NASDAQ: AMZN)I’m still looking for a good excuse to add to my position. A crash or abrupt fix would probably present a great opportunity to add to a sure-fire winner.
How Dominant is Amazon Online Retailing? In late April, eMarketer released a report estimating that Amazon would see $ 0.40 of every $ 1 spent online in 2021 through its marketplace. This is more than five times the online sales share of its closest competitor, Walmart.
Even though retail is a generally low-margin industry, Amazon has been able to use its dominance of e-commerce to sign up 200 million people worldwide for a Prime membership. Not only do Prime members spend significantly more than non-Prime customers, but the tens of billions of dollars in annual fees collected from Prime members help Amazon strengthen its margins and lower prices for traditional retailers.
What is all too easily overlooked with Amazon is that it is actually dominant in two categories. In addition to being America’s largest online retailer, it controls about a third of all cloud infrastructure spending through Amazon Web Services (AWS). Since cloud margins are significantly higher than retail margins, AWS, along with rapidly growing subscription services and ad revenue, will help Amazon more than double its operating cash flow by the middle. of the decade.
A stock market crash would also be a great time to pick up what I think is the number one cybersecurity stock, CrowdStrike Holdings (NASDAQ: CRWD).
There is no doubt in my mind that cybersecurity will be one of the safest double-digit growth trends of this decade. As businesses move their data and that of their customers to the cloud, the responsibility for protection will increasingly fall on third-party providers like CrowdStrike. Fortunately, the company’s cloud-native Falcon platform is ready.
Being built in the cloud and leveraging artificial intelligence enables Falcon to identify and respond to threats faster and more cost effectively than on-premise security solutions. In a typical week, Falcon oversees and evaluates 6,000 billion events.
CrowdStrike’s operating performance speaks for itself. In less than five years, it has grown from 450 subscribed customers to more than 13,000, and has still retained 98% of its customers. Perhaps even more impressive is that, in just over four years, the percentage of its customers with four or more cloud module subscriptions has increased from 9% to 66%. Getting its customers to buy additional services is precisely why this company has already achieved its long-term subscription gross margin goal while in the early stages of its growth.
The sky is the limit for CrowdStrike, and any significant discounts during a crash should be considered.
A third unstoppable title that I would love to grab back in a market crash or abrupt correction is the cloud-based customer relationship management (CRM) software provider. Salesforce.com (NYSE: CRM).
Much like online retail and cybersecurity, CRM software is a sustainable double-digit growth trend. CRM software is used by businesses in direct contact with consumers to improve existing customer relationships and increase sales. It can handle basic functions such as accessing real-time customer information and overseeing customer service issues, as well as more complex tasks, such as managing online marketing campaigns and executing predictive sales analyzes on an existing customer base. While CRM software is perfect for the retail and service industries, it finds many uses in the industrial space, as well as in the healthcare and finance industries.
Salesforce is the undisputed most dominant player in the CRM space. In the first half of 2020, he was responsible for almost 20% of all global CRM spending. That’s more than its four closest competitors combined. This means that Salesforce, like Amazon, has a comfortable lead in market share.
Additionally, Salesforce thrives under the leadership of CEO and co-founder Marc Benioff. Benioff has helped orchestrate a number of profit-generating acquisitions, including MuleSoft and Tableau. The latest deal, the purchase of the cloud-based business communications platform Slack Technologies, will provide another opportunity for Salesforce to cross-sell its products and appeal to small and medium businesses.
With Salesforce on track to more than double sales to $ 50 billion over the next five years, any significant drop in its share price should be viewed as a buying opportunity for patient investors.
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