As 2020 draws to a close, it's easy to look back on it and see all the turbulence that came with it, including a coronavirus pandemic and plenty of economic and political uncertainty. And yet, more unpleasant surprises could still be lurking around the corner.
For instance, in November, the cyclically adjusted price-to-earnings (P/E) ratio for the S&P 500 hit 33.1, a lofty level that exceeds the one seen in September 1929 just before the stock market crash that preceded the Great Depression. The "Buffett indicator," which compares the Wilshire 5000 Total Market Index to U.S. GDP, is also signaling a steep market overvaluation with a level currently sitting at 183%.
It is impossible to time the market's major swings. But paying heed to market indicators like these may offer an opportunity for investors -- including those who invest using the Robinhood trading platform -- to protect a portion of their portfolios by investing in stocks that can hold up well in a potential market crash.
Investors looking for a crisis-proof company should look no further than Walmart. This popular blue-chip retailer has served customers since 1962 and is well-positioned to survive a potential market crash because of its consumer staple market niche and low beta of 0.44. Beta is a measure of volatility. Stocks with a beta below 1.00 tend to be less volatile than average, while stocks with a beta above 1.00 tend to be more volatile. With a beta of 0.44, Walmart's stock is significantly more stable than the average company, making it more likely to hold its value during a market downturn.
This characteristic has a lot to do with its business model of selling low-priced everyday items.
People have to eat no matter the economic environment. And household essentials like toilet paper, soap, and laundry detergent are also super important. Investors know that black swans in the economy (such as the coronavirus pandemic of 2020) won't significantly reduce demand for essential products, so they expect Walmart's revenue and earnings to remain relatively stable.
Walmart posted a year-to-date gain of 27% in 2020 (compared to just 17% in the S&P 500) partly because it coasted through the downturn in March without missing a beat. The stock's price-to-earnings multiple of 21 is also lower than the market average of 37, which makes it a relatively good value for investors.
2. Johnson & Johnson
Like Walmart, Johnson & Johnson is a safe, blue-chip stock that can weather a market crash because of its consumer defensive strategy. Founded in 1886, the company manufactures and markets pharmaceuticals and packaged consumer goods such as bandages, skincare products, and baby formula -- items consumers tend to buy no matter what is going on in the economy. Johnson & Johnson is also hedged against pandemic-related risks because of its COVID-19 vaccine candidate, JNJ-78436735.
Evercore analyst Josh Schimmer estimates that the global COVID-19 vaccine market could be worth up to $100 billion in sales and $40 billion in profits. If approved, Johnson & Johnson's vaccine would split that opportunity with competitors like Pfizer and Moderna, which are also developing vaccine candidates.
While Johnson & Johnson lags behind the front-runners in the rush to get a vaccine to market, the company has begun enrolling participants for its second global phase 3 clinical trial and is ready to manufacture 1 billion does in 2021, according to Paul Lefebvre, head of its COVID-19 vaccine supply chain. Johnson & Johnson's large production capacity could help it fill demand that competitors can't meet in the rush to get huge numbers of people vaccinated.
The Johnson & Johnson vaccine may also be easier to store and administer because it may only require one dose (compared to two doses for the Pfizer and Moderna vaccines) and be stable at refrigerator temperatures for up to three months.
Johnson & Johnson's third-quarter sales increased by 1.7% to $21.1 billion, and adjusted diluted earnings-per-share rose 3.8% to $2.2. The stock has a P/E ratio of 23, which is lower than the market average because of the company's slow but steady growth profile. And with a beta of just 0.68, Johnson & Johnson is also significantly less volatile than average, making it a good bet for investors who want to add safety to their portfolio.
Slow and steady wins the race?
Robinhood investors have a reputation for betting on risky growth stocks. But the popularity of Walmart and Johnson & Johnson shows that many investors on the platform favor a more cautious approach -- a smart move as the stock market soars to potentially overvalued levels. Walmart and Johnson & Johnson can survive another market crash because of their low betas and defensive business models. Both companies also boast lower than average P/E ratios, which makes them a good pick for value-conscious investors.