The investment community was taken for quite the ride last year. During the first quarter, uncertainty tied to the coronavirus disease 2019 (COVID-19) pandemic lopped more than a third off of the benchmark S&P 500 (^GSPC 0.02%) in under five weeks. Investors spent the following nine months enjoying a snap-back rally for the ages.
When the curtain closed on 2020, the S&P 500 finished the year higher by 16%. That's an impressive accomplishment given how steep of a recession the U.S. economy worked its way through.
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But I have bad news: Another stock market crash is going to happen.
We may not be able to predict when a crash will occur, how long it'll last, or how steep the decline will be, but history is crystal clear that stock market crashes and corrections are a perfectly normal part of the investing cycle. Over the last 71 years, there have been 38 instances where the S&P 500 declined by at least 10% from a recent high. That works out to a double-digit correction, on average, every 1.87 years.
In 2021, there are no shortage of potential downside catalysts. Everything from COVID-19 infections and response to a lack of economic assistance from Capitol Hill has the potential to shift short-term sentiment and send the broader market tumbling.
Now for some good news: A stock market crash is an opportunity for long-term investors to put their money to work in great companies at a discount. Should a crash arise in 2021, the following three stocks would be the perfect additions to your portfolio.
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Intuitive Surgical
Healthcare stocks are a great place to park your money during spikes in market volatility. Since we don't get to choose when we get sick or what ailment(s) we develop, demand for drugs and devices remains pretty steady, regardless of how or poorly the U.S. economy is performing. This holds true for surgical procedures, which is why robotic-assisted surgical systems developer Intuitive Surgical (ISRG -0.55%) is the perfect stock to buy during a stock market crash.
Buying into industry leaders is typically a smart move in any market environment. Intuitive ended September with 5,865 of its da Vinci surgical systems installed worldwide, which is far more than any of its competitors on a combined basis. What's more, some of the company's deep-pocketed peers have run into launch delays of competing systems. This means the many generations of the da Vinci surgical system will control the lion's share of soft-tissue robotic surgeries for a long time to come.
What's so impressive about Intuitive Surgical is that it's been built on the razor-and-blades business model. The idea here is to get the customer to buy a low-margin razor, then make bank by selling high-margin blades for a long time. Intuitive's da Vinci system is the razor. It's a pricey system that generates quite a bit of revenue, but it's also intricate and costly to build. Where the company generates most of its margin is from selling instruments and accessories with each procedure (i.e., the blades), as well as from servicing its systems. As more systems are installed, these higher-margin revenue streams account for a larger percentage of total sales.
If a market crash does occur in 2021, you can confidently buy Intuitive Surgical on any weakness.
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Annaly Capital Management
Another perfect stock to scoop up when the stock market turns south is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -0.32%).
The mortgage REIT operating model is pretty simple. Companies like Annaly are borrowing money at short-term rates and buying assets (e.g., mortgage-backed securities (MBS)) that bear a higher yield over the long run. This difference between the higher long-term yield and lower short-term borrowing rate is called the net interest margin (NIM). The wider the gap, the more profitable a company like Annaly can be.
As we enter the early stages of an economic recovery for the U.S. economy, history has shown that the yield curve tends to notably steepen. In other words, Annaly's NIM would be expected to widen over the coming years, no matter how volatile the stock market gets.
Furthermore, Annaly's portfolio is almost entirely devoted to buying agency MBSs. An agency asset is one that's backed by the federal government in the event of default. Although agency assets have lower yields than non-agency assets, the protection provided by agency MBSs has allowed Annaly to use leverage to its advantage.
Investors in Annaly should expect modest share price appreciation to go along with a dividend yield that's regularly hovered around 10% for more than a decade.
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Johnson & Johnson
A third perfect stock to buy if the stock market crashes is healthcare conglomerate Johnson & Johnson (JNJ -0.69%). As noted, healthcare stocks are predominantly insulated from wild market and economic fluctuations, making them ideal for investment.
One thing investors absolutely love about Johnson & Johnson is that all three of the company's operating segments bring something important to the table. For example, consumer healthcare products is the slowest-growing segment, but it provides relatively strong pricing power and the most predictable cash flow. Meanwhile, an aging U.S. and global population offers a long growth runway for medical devices. Finally, pharmaceuticals offer a finite period of exclusivity but generate the bulk of J&J's margin.
There's also no overlooking Johnson & Johnson's consistency. The largest publicly traded U.S. healthcare company has increased its base annual dividend in each of the past 58 years. It also had a streak of 36 consecutive years of adjusted operating earnings growth prior to COVID-19, and is one of only two publicly traded companies with a AAA credit rating from Standard & Poor's. For context, that's even higher than the AA credit rating assigned to the U.S. government.
Johnson & Johnson won't offer the same jaw-dropping growth potential as Intuitive Surgical, but you'll sleep well at night as a shareholder.
