If you weren't sure you had the fortitude to be a long-term investor, 2020 has answered that question. The benchmark S&P 500 lost more than a third of its value in roughly one month, then recouped everything it lost (and then some) in the subsequent five-month period. Volatility has been far above historic norms this year -- and it may not be over just yet.
This past week, investors were given a stark reminder that stocks can and do go down. Stock market crashes and corrections are far more common than most investors realize, with 10% moves lower in the S&P 500 occurring, on average, every 1.84 years since 1950.
But there's good news. Every single stock market crash in history has proved to be an opportunity for long-term investors to buy into great companies at a perceived discount. Although we're never going to know beforehand when a crash will occur, how long it'll take to hit bottom, or what that bottom number might be, we know that the broader market eventually erases all crashes and corrections.
The $64,000 question is, "What to buy if a stock market crash occurs?"
While it's impossible to perfectly shield your portfolio from downside given that crashes and corrections are natural parts of the economic cycle, there are a handful of virtually flawless stocks you should consider buying during notable market weakness. The next time the stock market crashes, buy these four stocks.
First up is surgical system device maker Intuitive Surgical (NASDAQ:ISRG). Healthcare stocks are highly defensive and rarely take direct hits during recessions. Since we can't fully control when or how we get sick, drug and device makers stay busy no matter how the U.S. economy is performing.
Intuitive is special because of its insurmountable competitive edge. It's installed 5,865 of its da Vinci surgical systems over the past 20 years -- far more than all of its competitors combined. Over that time, Intuitive Surgical has built up priceless rapport with hospitals and surgical centers that are unlikely to switch to a competitor given the cost of the da Vinci system ($0.5 million to $2.5 million).
What's more, Intuitive Surgical is designed to become a more efficient business over time. In the 2000s, the company derived most of its revenue from selling its pricey da Vinci system. Since these systems are expensive to build, Intuitive Surgical didn't net great margins from them. Over the past decade, the company's higher-margin segments -- instruments, accessories, and servicing -- have picked up. As more systems are installed worldwide, these higher-margin segments will play a larger role in total sales.
Another virtually flawless company to scoop up during a stock market crash is fintech stock Square (NYSE:SQ). Yes, the fintech space is going to get crowded as more mature players adapt to a digitized world, but Square's place at the leading edge of innovation looks very secure.
Square is best known for its seller ecosystem, which provides point-of-sale devices, payment analytics tools, and business loans. Between 2012 and 2019, the gross payment volume (GPV) traversing Square's platform grew by almost $100 billion to $106.2 billion. Though Square has historically focused on smaller businesses, its recent quarterly reports show that larger businesses (in terms of annualized GPV) are increasingly using its seller platform. Since this segment is driven by merchant fees, the seller ecosystem has a solid foundation for growth.
The more exciting growth opportunity for Square is Cash App. This peer-to-peer payment platform has seen its monthly active user (MAU) count more than quadruple to 30 million between the end of 2017 and June 30, 2020, with some 7 million users also using Cash Card -- a traditional debit card that pulls from a user's Cash App balance. Cash App generates revenue from merchant fees, transfer fees, and bitcoin exchange fees. I fully expect it'll be the company's No. 1 source for gross profit by 2022, or perhaps sooner.
A plunging stock market is also the perfect time to put your money to work in high-growth social media company Pinterest (NYSE:PINS), which blew the doors off of Wall Street's sales expectations this past week.
Whereas most social media companies not named Facebook run into user growth issues, Pinterest is piling on new MAUs. It ended the most recent quarter with 442 million global MAUs, up 37% (120 million) from the prior-year period. Around 90% of the company's new users are from international markets. Although average revenue per user (ARPU) is considerably lower in international markets than in the U.S., Pinterest's rapid growth is based on doubling its non-U.S. ARPU multiple times this decade.
Pinterest also envisions becoming an e-commerce powerhouse. Pinterest's 442 million MAUs are using the platform to post about goods, services, and places that interest them. They're essentially motivated customers telling businesses what they want. Pinterest has already partnered with cloud-based e-commerce solutions provider Shopify to help connect small businesses with its user base. As long as Pinterest finds ways to keep its MAUs engaged, the sky is the limit on its e-commerce potential.
I know I mentioned Intuitive Surgical earlier, but doubling down on healthcare innovation is a great idea for long-term investors. The fourth and final virtually flawless stock to buy during a market crash is telemedicine giant Teladoc Health (NYSE:TDOC).
Yes, Teladoc has benefited hugely from the coronavirus disease 2019 (COVID-19) pandemic. Doctors want to keep at-risk and potentially infected patients out of their offices when possible. But Teladoc was seeing a huge uptick in demand well before COVID-19 hit, with the company delivering compound annual sales growth of 74% between 2013 and 2019. Since telemedicine is cheaper for health insurers than in-person visits and far more convenient for patients and physicians, it represents the future of personalized care.
Equally exciting is Teladoc's ongoing acquisition of applied health signals company Livongo Health (NASDAQ:LVGO) in an $18.5 billion cash-and-stock deal. Livongo's solutions use data collection and artificial intelligence to send members tips and nudges that induce lasting behavioral changes. Livongo has produced four consecutive adjusted quarterly profits, and its diabetes member count has nearly doubled or more than doubled virtually every quarter for the past three years.
When this deal closes, the cross-selling potential for telemedicine and applied health signal solutions will be huge.