No matter how the stock market performs, you never have to look far for an expert calling for a crash or abrupt correction. While we never know precisely when a crash or correction will occur, how long it will last, or how steep the decline will be, a real certainty in investing is that ebbs and flows are common.
In other words, it’s not really about if a stock market crash will occur; it’s just a matter of how you will react when you knock.
A stock market crash is inevitable
Right now, there are plenty of reasons why a stock market crash would make sense. The main one is the valuation of nosebleeds linked to the S&P 500 (SNPINDEX: ^ GSPC). The S&P 500’s Shiller price-to-earnings (P / E) ratio – a measure of inflation-adjusted earnings over the past 10 years – topped 38 this week, marking a nearly two-decade high. In each of the previous four cases where the S&P 500 Shiller P / E ratio exceeded and maintained 30, it ended up falling by at least 20%.
There are also growing concerns about rising inflation. A number of economists have suggested that inflation for the past 12 months is currently above 5%, which would mark a high of more than a decade. Rapidly rising inflation could force the Federal Reserve to act faster than expected by raising interest rates and ending its quantitative easing program. Or put it simply, higher borrowing rates could crush the access to cheap capital that has fueled growth stocks for more than a decade.
Even history serves as a warning to the stock market. Aside from the coronavirus crash, there have been eight other bear markets since the start of 1960. For each of those bear markets, there has been at least a double-digit percentage decline within three years of the trough.
However you slice the data, the catalyst for a crash is there, and at some point in the future a crash or abrupt fix will occur.
These Dow Stocks Would Be Perfect Buyers In A Crash
While it may sound like bad news, crashes are actually an incredible opportunity for long-term investors to put their money to work for large corporations at a reduced price. One of the fastest ways to find good companies is to take a closer look at Dow Jones Industrial Average (DJINDICES: ^ DJI). The Dow Jones is made up of 30 successful and proven multinational companies that have made investors fortunes.
When the next stock market crash hits, the next trio of Dow stocks can be comfortably bought hand in hand.
If there is such a thing as an obvious buy in the Dow Jones during a crash or strong correction, it is the backbone of payment processing. Visa (NYSE: V).
The reason Visa’s chart looks like a perpetual bullish trend is because it is a cyclical company with a core of a numbers game that strongly favors patient investors. While Visa can be affected by recessions (when consumers and businesses cut spending), the data shows quite conclusively that economic contractions and recessions typically do not last longer than two quarters. During this time, periods of economic expansion are often measured in years.
While Visa faces tough times at times, the benefits of long-term economic expansion, and therefore higher consumer and business spending, disproportionately outweigh any problems it may face.
You’ll also want to note that Visa has an extremely large presence in the # 1 consumer market in the world: the United States. In 2018, Visa controlled a 53% share of the credit card network’s purchasing volume in the United States, more than 30 percentage points higher than its next closest competitor, MasterCard. After the Great Recession, Visa increased its market share in the United States by more than nine percentage points.
Another factor that makes Visa special is its loan avoidance. Visa processes payments and takes a small slice of its merchants – that’s it. While it forgoes the ability to collect interest and fees during long periods of expansion, avoiding lending also means Visa doesn’t need to put money aside when credit defaults increase. as is generally the case during recessions. Not having to put capital aside means recessions rebound faster than its peers, and that’s what sustains the company’s over 50% profit margin.
Visa is the perfect example of a sure-fire Dow stock to buy in a crash.
Read the fine print for any online brokerage firm, and they will somehow state that “past performance is no guarantee of future results.” But don’t tell that to the health giant UnitedHealth Group (NYSE: UNH). This high-flying Dow stock has generated 12 straight years of earnings, including dividends, to its shareholders, and appears to be on course to become the lucky 13th.
The first thing that makes UnitedHealth such a great stock to buy in a crash is the defensive nature of the healthcare industry. People keep getting sick just because the stock market has bad weeks or months. This highly predictable demand for health services is driving growth in UnitedHealth’s two core businesses.
Most people are probably familiar with UnitedHealth’s insurance operations. The good thing about insurance companies is that they are usually able to pass on higher premiums to cover growing future expenses. This ability to increase premiums for individual members and companies ensures that profitability will continue to increase over time.
UnitedHealth Group’s second operating segment, Optum, may well be the most exciting. Optum itself is built on three segments that provide everything from pharmacy care and dispensing services to data analytics and software used by hospitals and health-focused organizations. Optum is growing steadily at a faster rate than the insurance segment and more often than not generating a more impressive operating margin.
In short, UnitedHealth Group offers consistency, which makes it a smart Dow stock to buy in the event of a crash.
A third Dow stock that should be on your shopping list in the next stock market crash is the software giant Microsoft (NASDAQ: MSFT).
Like Visa, Microsoft is a cyclical business that could be negatively affected in the short term by a crash and / or recession. It’s not uncommon to see tech stocks, which are often priced at a premium, gain the upper hand during times of heightened volatility. However, three key enablers and periods of disproportionate economic expansion make Microsoft a sure bet for making money for investors over the long term.
For starters, Microsoft has fully embraced cloud infrastructure services and cloud solutions. According to Canalys, Azure had the second largest share of global cloud infrastructure spending in the first quarter. Meanwhile, the company’s other cloud operations, including Dynamics, Office commercial, and Windows commercial, all increased sales by at least 10% year-over-year in the quarter ended in March. It might be hard to believe, but we are most likely still in the early stages of cloud infrastructure growth.
Second, don’t overlook legacy operations from Microsoft. While Wall Street doesn’t look for the company’s Windows operating system (OS) to drive sales like it once did, Windows remains by far the most dominant operating system for personal computers. Being able to generate consistently high margins and cash burdens from existing operations is another piece of the puzzle.
The third and final piece of the puzzle is Microsoft’s inorganic growth. Bringing in so much cash flow each year allows Microsoft to take risks on the acquisition front that most businesses cannot. While not all of his deals were successful, most of his acquisitions ended up helping the company.
Investors can buy Microsoft with confidence when the next crash hits.
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.