This year has been a rollercoaster for investors in stocks. Following the arrival of the novel coronavirus in the U.S. this past spring, the S&P 500 index crashed almost 34% in barely a month, then recouped all its losses -- and then some -- within five months.
But there seems to be a disconnect between Mr. Market and economic reality. The COVID-19 pandemic rages on, unemployment numbers are weak, and uncertainty around the U.S. presidential elections looms large. This backdrop makes another stock market crash almost inevitable.
While you can't avoid a stock market crash as an investor, here's what you can do: Keep some cash handy, do your homework, and have a list ready of high-quality stocks to buy when their prices correct. Here are three such high-conviction stocks I've added to my watch list.
One high-flying trend no investor can ignore
When hunting for bargains, I'm not looking for stocks that might bounce on temporary or short-term catalysts. I'm a long-term player, so my ideal stocks should not merely recover, but actually grow even faster than the market on secular trends already underway. Renewable energy is one such trend, and NextEra Energy (NEE -1.36%) my top stock pick in this space.
Knowing what stocks to buy ahead of a market crash is a prudent investing tactic. Image source: Getty Images.
Since 2000, renewable energy has been the fastest-growing source of energy in the U.S. In 2019, energy consumption from renewable energy surpassed coal in the U.S. for the first time in nearly 140 years, according to the Energy Information Administration. Industry experts peg renewable energy to attract investments worth trillions of dollars over the next decade.
NextEra Energy is the largest producer of wind and solar energy and among the largest battery storage companies in the world. The company also provides electricity to more than 5 million customers in Florida through its traditional utility business.
So while its utility business should ensure a steady flow of stable cash flows, its clean energy portfolio should drive growth. NextEra had a backlog of nearly 14,400 megawatts of renewables -- among the largest in the world -- as of the end of the second quarter. The company is planning to pump $12 billion-$14 billion annually between 2019 and 2022, a good chunk of which should go into renewables. Then there's the $12 trillion green hydrogen opportunity that NextEra could hugely benefit from.
NextEra grew its adjusted earnings per share (EPS) and dividend at compound annual growth rates of 8.4% and 9.4%, respectively, between 2004 and 2019. Looking ahead, the company projects adjusted EPS to grow at least 8% and its annual dividend to grow 10% through 2022. With such an impressive operational history and promising growth goals, NextEra Energy is my no-brainer stock to buy on a price dip.
The only gold stock on my radar
The rally in gold prices this year has proven yet again how investors flock to the yellow metal to preserve wealth during uncertain times. With chances of both a stock market correction and gold prices hitting a record this year presumably high, I have my eyes fixed on gold stock Franco-Nevada (FNV 1.13%).
With gold mining giants like Barrick Gold (GOLD 0.06%) ruling the headlines lately -- especially after Warren Buffett's Berkshire Hathaway bought a stake in the gold-mining stock -- you may ask: Why Franco-Nevada?
Risk is a big factor. While Barrick is a pure mining company that incurs heavy costs and bears big risks to develop and dig mines to extract metals and minerals, Franco-Nevada is a gold streaming and royalty company. Instead of extracting metal, it buys gold from miners like Barrick under predecided percentages and prices -- which are often set at levels substantially below the metal's spot prices -- in exchange for funding the miners upfront.
So Franco-Nevada can secure gold at discounted prices to sell in the market, and therefore earn much higher margins than traditional miners like Barrick, minting even more money as gold rallies. In the second quarter, for example, despite flat gold equivalent ounce sales year over year, Franco-Nevada's revenue jumped 26% on higher gold prices. It earned $105.8 million in operating income against revenue worth $195.4 million.
Talking about growth outlook during Franco-Nevada's Q2 earnings call, CEO Paul Brink said the company is "particularly well positioned as the gold price runs with a close to 20-year reserve life and built-in growth for the next number of years." With Franco-Nevada also dealing in silver, palladium group metals, and oil and gas royalties, I'd gladly scoop up this gold stock during a market crash.
E-commerce is where the money is
FedEx (FDX 0.12%) shares have absolutely crushed the market and hugely outrun NextEra Energy and Franco-Nevada since the March market crash. The reason behind for this impressive performance? The coronavirus pandemic.
Consumer behavior has changed dramatically during the COVID-19 pandemic. More people are skipping trips to brick-and-mortar stores in favor of shopping online. With e-commerce booming, FedEx's revenue jumped 13% year over year in its fiscal 2021 first quarter ended July 31, driven by unprecedented demand for FedEx Ground and FedEx Express services. FedEx Ground revenue soared 36% as residential deliveries surged on stay-at-home orders. FedEx's January launch of a seven-day residential delivery program couldn't have been better timed.
The circumstances driving the jaw-dropping rally in FedEx's share price are exceptional, but the push to e-commerce could be long-lasting, setting the stage for growth for FedEx for years to come. For now, FedEx is preparing for a peak holiday season, one that Chief Operating Officer Rajesh Subramaniam says could be "like no other in our company's history."
While FedEx didn't provide guidance for the full year, it foresees higher 2021 revenue and operating income for FedEx Ground and FedEx Express. With the company now claiming to have covered 95% of the U.S. population under its seven-day residential program, last-mile delivery could add substantial value going forward. Given that backdrop, FedEx is one stock I'll be watching like a hawk ahead of the next market crash.
