For many investors, the idea of a stock market crash is terrifying — especially with the memory of the coronavirus crash, which saw the benchmark S&P 500 (SNPINDEX:^GSPC) lose 34% in 33 calendar days, still fresh.
However, stock market crashes are unavoidable. They’re a natural part of the investing process and the price of admission to one of the greatest wealth creators on the planet.
The writing is on the wall that a crash may be coming
There are currently a number of reasons to believe that a stock market crash or steep correction is on the horizon. For example, the S&P 500 has declined by at least 10% within three years of each of the previous eight bear markets prior to the coronavirus crash. Put another way, no bounce-back from a bear market bottom is ever this smooth. It’s a process, and that process is often filled with emotional ups and downs.
History also suggests that valuation could be the cause of a stock market crash. The Shiller price-to-earnings (P/E) ratio for the S&P 500 — a measure of inflation-adjusted earnings over the previous 10 years — is nearing a two-decade high, and is more than double the 151-year average. More worrisome is that in each of the previous four instances where the S&P 500’s Shiller P/E has crossed above 30, the index has subsequently shed at least 20% of its value.
If you want something more tangible than historical data, take a closer look at margin debt. According to market analytics company Yardeni Research, margin debt outstanding hit almost $862 billion in May 2021 and has roughly doubled over the past eight years. Over the past 25 years, there have only been three instances where margin debt jumped at least 60% from the previous year (one of which is right now). In the previous two instances, the S&P 500 entered a bear market not long thereafter.
We may dislike pessimism, but stock market crashes are truly inevitable events.
A market crash is the perfect time to put your money to work
Then again, they’re also an opportune time to buy great companies at a discount. That’s because bull markets have eventually erased every crash and stock market correction in history. If you buy great companies with a long-term mindset, crashes are nothing more than once-in-a-lifetime sales events.
When the next stock market crash inevitably strikes, the following three no-brainer stocks will be ripe for the picking.
Some folks might be a bit leery of buying into a company that’s almost entirely dependent on advertising revenue. But when that company in question, Facebook (NASDAQ:FB), is the most dominant force in the social media space, you overlook things like revenue channel concentration.
The user statistics for Facebook are simply staggering. The company ended March with 2.85 billion monthly active users (MAU) visiting its namesake site and another 600 million unique users for WhatsApp and/or Instagram, which Facebook also owns. Over the trailing 12 years, its namesake site has seen MAU growth average 25% annually (197 million first-quarter 2019 to 2.85 billion in Q1 2021).
Altogether, we’re talking about 3.45 billion people, or 44% of the world’s population, visiting a Facebook-owned asset monthly. Since no other social media platform even comes close to this many eyeballs, advertisers are willing to pay big bucks to get their message to users.
And what’s craziest of all is that Facebook CEO Mark Zuckerberg hasn’t even meaningfully monetized all of his company’s top assets yet. Ads from Facebook and Instagram will likely generate more than $100 billion in revenue this year. Comparatively, WhatsApp and Facebook Messenger are two of the six most-visited social sites, yet they aren’t meaningfully contributing to the company’s top or bottom line. In other words, Facebook has another supercharged growth phase yet to come.
Healthcare stocks are an incredibly smart place to put your money to work during a crash because healthcare is a defensive sector. No matter how wild volatility gets on Wall Street, people will still get sick and develop ailments that require treatment. That’s why robotic-assisted surgical systems developer Intuitive Surgical (NASDAQ:ISRG) is such a no-brainer buy when a crash occurs.
Sticking with this list’s theme of dominance, Intuitive Surgical has placed more than 6,100 of its da Vinci surgical systems into hospitals and surgical centers worldwide. That’s more than all of its peers, combined. The high cost of these systems, coupled with the training given to surgeons, makes it unlikely that we’ll see any of the company’s clients switching to a competitor.
The best aspect of Intuitive Surgical is that its operating model is built to generate successively higher margins over time. In its early days, selling its pricey da Vinci system made up the bulk of its revenue. However, these are costly systems to produce, thereby leading to only mediocre margins. As time has passed and the base of installed systems has grown, selling instruments with each procedure and servicing its systems now accounts for the bulk of its revenue. That’s good news, because these are higher-margin sales channels.
With a long runway ahead for da Vinci to pick up market share in thoracic, colorectal, and general soft tissue surgery, Intuitive Surgical looks unstoppable.
Let’s be honest, is there ever a bad time to buy into Amazon (NASDAQ:AMZN)? It’s consistently dominant in two businesses and is seeing its operating cash flow go to the moon. If the market were to crash, it should be high on your list of buys.
It’s most visibly dominant in the retail space. The company’s online marketplace controls approximately 40% of all e-commerce sales in the United States, per an eMarketer report. This utter dominance of U.S. online retail sales has helped the company sign up more than 200 million people to a Prime membership worldwide. Paying for a membership encourages these folks to spend more and remain loyal to Amazon’s ecosystem of products and services. It also doesn’t hurt that the company is collecting fees from Prime members that bolster its thin retail margins.
But Amazon is about more than just selling things online. Advertising revenue is up, it’s becoming a logistical powerhouse, and, most importantly, it’s the leading provider of cloud infrastructure services. Amazon Web Services (AWS) grew sales by 30% during pandemic-riddled 2020, and it’s on track for $54 billion in annual run-rate revenue, based on the $13.5 billion generated in the March-ended quarter.
Because cloud margins trump retail and ad margins, the rapid growth of AWS has Amazon set to potentially triple its operating cash flow by 2025. It’s an unstoppable company in virtually any market environment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.