Most investors aren’t big fans of stock market crashes or steep corrections, but the reality is that they are very likely on their way.
Even if the benchmark S&P 500 (SNPINDEX: ^ GSPC) has seen a historic recovery rally with the index rising 95% since hitting its pandemic low on March 23, 2020. Both history and economic data serve as a warning as to where it is likely to go next.
A stock market crash is in sight
Perhaps the most tell-tale sign of trouble can be seen in the way the market has rebounded from bear markets in the past. There have been nine bear market declines (i.e., drops of at least 20%) since 1960, including the most recent coronavirus crash, according to data from market analyst Yardeni Research. If we look at the last eight bounces, each one showed at least a double-digit percentage correction within three years of finding a floor. In other words, rallying off a bear market floor is a bumpy / bumpy process rather than the smooth rebound we have seen in the past 15 months.
Equally worrying is the valuation of stocks. The Shiller Price Earnings Ratio (P / E) of the S&P 500 – the Shiller P / E ratio takes into account inflation-adjusted earnings over the past 10 years – ended the previous week above 38 for the first time in nearly two decades. That’s more than double the 151-year average Shiller P / E for the S&P 500 of 16.84. But it is not this deviation that is worrying. The last four times the Shiller P / E for the S&P 500 was above 30, it has subsequently fallen at least 20%.
On the economic front, inflation poses a credible threat to the steadfast rise in the market. Rising prices for goods and services could cause the country’s central bank to respond earlier with monetary tightening procedures. Higher lending rates could limit the plentiful access to cheap capital that has propelled the market for more than a decade.
Put simply, there is no shortage of concern that could make the S&P 500 shout down.
A falling market is your cue for buying those surefire earnings stocks
However, there is another side to this medal. More specifically, every single crash or steep correction in stock market history has ultimately turned out to be a buying opportunity. That’s because every single crash and correction is wiped out over time by a bull market rally. If you buy profitable stocks with clear competitive advantages and let your investment thesis play out over time, buying on significant drops is a proven formula for getting rich.
When the next stock market crash comes, these are the earnings stocks you should have on your buy list.
The first winner to buy during a market crash or correction is the insurance and healthcare giant UnitedHealth Group (NYSE: UNH). Including the dividends paid, UnitedHealth has not had a negative total return for its shareholders in 12 years (and will continue to do so).
Due to their defensive nature, health stocks are a pretty logical place to invest your money during increased market volatility. No matter how well or how bad the stock market and US / global economy do, people get sick and need treatment. This results in pretty constant demand for most health stocks.
UnitedHealth Group is probably best known for providing health insurance through individual and corporate policies. The great thing about health insurance is that there are more than enough reasons to increase your premiums annually to cover future expenses. While there is a slowdown in speed in the health insurance industry, UnitedHealth’s insurance business is consistently profitable and growing.
But the real appeal of UnitedHealth Group is the Optum division. Optum offers everything from pharmacy care services to software and information technology that hospitals and health clinics rely on. Optum is growing much faster than UnitedHealth’s traditional insurance business and also tends to generate more favorable operating margins.
With UnitedHealth’s stock appreciating, it could soon become the largest healthcare stock by market cap in the US
Palo Alto networks
Another profitable stock that investors can confidently add to their portfolio in the event of a stock market crash is cybersecurity stocks Palo Alto networks (NYSE: PANW).
Palo Alto, like UnitedHealth, benefits from the fact that cybersecurity has become a basic needs service. No matter how good or bad the economy is, robots and hackers never take a day off. As more companies go online than ever and move their data to the cloud, the protection of corporate and consumer data will increasingly fall to third parties like Palo Alto Networks.
For years, Palo Alto has continuously moved its product suite away from physical firewalls towards cloud-based subscription services. There are several reasons for this transition. First of all, cloud-focused platforms are more agile and can often react faster to threats than local solutions. Over time, this also makes cloud-based subscriptions a cheaper and more efficient choice for most businesses. Additionally, subscription margins are much higher than physical firewall products, and there should be fewer lumps in revenue recognition too.
The success of Palo Alto Networks is also a function of its willingness to make additional acquisitions. These purchases are intended to expand the range of cybersecurity subscription offerings and / or make the company more attractive to small and medium-sized businesses.
What management is doing clearly works because Palo Alto looks unstoppable.
A third profitable stock that has the potential to make you a whole lot richer if you buy it during a sharp market decline is Apple (NASDAQ: AAPL).
Though Apple is in the cyclical tech sector, the company’s exceptionally loyal following has made its products basic commodities. Every time Apple introduces a new product, lines typically run around its stores, demonstrating the loyalty and innovation that are at the heart of Apple’s operating model.
For the next several years, the iPhone should remain Apple’s primary cash flow driver. As cellular companies upgrade their infrastructure for 5G speeds, consumers and businesses will likely have to spend years upgrading their devices. Let’s not forget that it has been a decade since we last saw a notable improvement in wireless download speeds.
Apple CEO Tim Cook is also overseeing a transition that should result in less flat-rate revenue recognition and higher margins over time. While Apple will continue to lead the way in products, Cook is leading a change that highlights Apple’s services and platforms. Services are a sustainable double-digit growth opportunity.
After Apple generated nearly $ 100 billion in operating cash flow over the past 12 months, Apple continues to prove to investors why it’s such a winner.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.