After the Covid induced crashes seen in stock markets across the world last spring, share valuations everywhere have rebounded strongly. Good new for investors, especially those who ‘bought the dip’, but now attention has turned to the risk that valuations in many markets are in fact too high. It seems like a lifetime ago, but this was in fact the main debate in financial circles before Covid – just how much longer could the bull run of the previous years carry on?
Right now, central banks and governments around the world are pumped liquidity into the economy in order to prevent the lockdowns collapsing GDP. However, when this extraordinary level of stimulus is removed it is an open question which direction stocks markets will head in.
As the chart above reproduced from eToro shows, the Nasdaq-100 index now looks to have gained so much from the lows of last years as to be totally sustainable.
In addition to this, P/E ratios are currently at all-time highs, and this also suggests downwards corrections are highly likely. The most widely used metric is the Shiller P/E ratio, which measures inflation-adjusted earnings over the previous 10 years, and this gives very worrying reading for the S&P 500. The average P/E for the benchmark index tracking the performance of the largest US publicly listed companies has stood at around 16.8 since 1870. As of May, it had reached nearly 37. Effectively this means investors are paying far too much to access the earnings of US companies today.
If the next cyclical downturn in stock prices is not far away, how should investors be preparing for this?
Choppy Waters Means Profitable Opportunities!
Just because downward corrections might be on their way doesn’t mean it’s time to run to cash. Choppy trading waters create opportunities for agile investors. If anything, market volatility just means skill, research and foresight are rewarded more than would be the case when the whole market is rising. This could mean being quick to buy great companies when their prices fall temporarily, but it could also mean buying stock that tend to be ‘counter-cyclical’, or to do well when the general market is struggling.
Top 5 stocks to buy when the next market crash happens
1. National Grid
First things first – if a major downward correction is immanent, one approach is to switch some of your portfolio into so-called ‘defensive’ stocks. These are stocks which tend to hold up well in a market crash, but conversely won’t soar when the market is rising.
They are solid middle-performers who have fairly safe, non-volatile revenue streams. Taking on board some defensive stocks prior to a possible crash can be a good idea to stabilise an investment portfolio.
Energy and utilities companies can often perform this function, and National Grid is one of the best of these. National Grid offers a tasty dividend yield of around 5.4%, and has a near monopoly of energy infrastructure in the UK. It has also diversified into the North American market, and so is unlikely to collapse in value in the next downwards correction.
Familiar to most for their revolutionary online holiday booking portal, Booking Holdings share price has taken a big downward swing over the last 12 months.
However, it was the largest online travel agency prior to the pandemic, and as such can be expected to remain a market leader in the future. The key point is that holidays are exactly the sort of spending that consumers cut first in a downturn, but are likely to quickly return to in better times.
As such, the stock price of travel agents like Booking.com can be expected to fall dramatically in the next downturn, but to recover very rapidly. This makes them look like a great stock to buy whenever the whole market falls. Booking.com obviously have fierce competition these days from the likes of Airbnb, but I prefer Booking.com due to their better-established brand and better global presence.
Read Also: What are the Top 8 Tourism Stocks To Buy
Amazon may sound like a strange pick, but the truth is some companies are now so wired into the daily lives of consumers around the world that they simply must be included in almost all portfolios.
Amazon has a dominant position in several lucrative markets, ranging from consumer goods to cloud computing, and has ambitious plans to diversify even further into healthcare, banking and beyond. The ability of Amazon to generate immense free cash flow means they have the financial firepower to ensure these projects are successful. They also benefit from the fact that by now the brand is known and trusted in most major global markets.
As the chart above from Etoro shows, Amazon has roared ahead since the dip last spring. If any further dips occur, investors would be well advised to consider buying Amazon stock. This is one long-term investment that looks worthwhile at almost any price, but of course, if you can buy in when the sock is temporarily cheap then all the better.
Disney looks very, very attractive to investors right now. Importantly, their business model increasingly seems to be ‘recession-proof’, and this is why it’s been included in this list.
What I mean by this is that home entertainment services like Disney+ have shown themselves over the last year to be something consumers are willing to keep sending on, even when they are cutting back elsewhere.
This means Disney’s future revenues are looking very stable and secure, and this is what drives long-term valuations. The diversification into Disney+, alongside the more traditional studio and parks and experiences businesses owned and operated by Disney, makes it look like a stock to buy hand over fist whenever the market dips.
Some analysts even expect Disney to outperform Netflix within 18 months, so if you can buy this stock when it is cheap you should certainly consider doing so.
5. The Coca-Cola Company
Finally, the Coca-Cola Company is our last pick for potential top performers when the market could be about to turn south. Coca-Cola has long been one of world’s best consumer defensive stocks, and we can see no reason this won’t continue to be the case.
Coca-Cola itself is one of the world’s top brands and so it doesn’t easily lose value when the market swings lower. Combine this will solid earning growth potential, as well as a reasonable average dividend yield of just over 3%, and you can see why Coca-Cola looks attractive right now.
Stocks To Buy When The Market Crashes
The 5 stocks above all have some reason to make them good stocks to buy when the market crashes, or just before this happens if you can look ahead. This is because they are either likely to dip but ten quickly rebound, meaning profits can be made by buying low and selling high, or because they are likely not to dip too much in the first place.
If the expected market crash does come in 2021, or even 2022, investors need to be ready to reposition their portfolio’s fast to avoid losing too much. These stocks should be able to help you balance and prepare your portfolio of a market crash comes.
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