There are legitimate concerns of a pending stock market drawdown. Since the markets crashed in March and April of 2020, it's been a steady climb with fewer opportunities to buy a dip. The S&P 500 (^GSPC 0.87%), an index representing more than 83% of the total domestic stock market capitalization, rose 16% in 2020 and hasn't witnessed a major pullback since April.
While timing the market, of course, is a difficult endeavor that very few can achieve, buying quality stocks when markets tank is a proven formula to increase wealth in the long run. In other words, it'd be prudent to set aside cash to invest in the event of a sell-off. Here are three stocks I'm confident about should markets turn south.
Chipotle could double its total locations. Image source: Getty Images.
1. Chipotle
Chipotle's (CMG 0.53%) management reiterated its plan to eventually operate more than 6,000 restaurants, despite admitting to a near-term slowdown in expansion plans, thanks to the pandemic. The fast-casual restaurant chain currently operates a little over 2,700 locations, so the planned additions should help drive revenue growth for many more years to come. For instance, in 2021 management estimates that under normal operating circumstances, it should open 200 new restaurants. At that pace, it would take at least a decade to hit its ambitious goal of operating 6,000 restaurants.
Chipotle adapted to the pandemic by quickly shifting its focus to meal delivery and online ordering. As a result, digital sales increased by 203% in the third quarter compared to the year-ago quarter, helping offset decreases from in-person dining. Those investments should continue paying dividends even after the pandemic, and allows the restaurant to offset lost revenue from in-person dining.
It's also worth noting that one of the lingering effects of the pandemic that might work to Chipotle's advantage is an increase in market share as a result of smaller, struggling restaurants eventually closing down. However, that may only prove to be beneficial over the short term.
Chipotle's actions to hedge itself against near-term risks, and its excellent long term growth prospects, make it a great stock to buy in the event of a stock market crash.
Disney has over 100 million streaming subscribers. Image source: Disney.
2. Disney
Even though the outbreak of the COVID-19 disease negatively affected Disney (DIS -0.55%) in many ways, its stock price still increased in 2020. That was largely due to the stellar performance of its streaming services (Disney+, Hulu, ESPN+), which combined to reach a total of 137 million subscribers as of Dec. 2, 2020.
The House of Mouse has been delighting families with its products and services for several decades and will likely continue to do so for decades more. Meanwhile, the shift in consumer behavior during the pandemic -- surging demand for in-home entertainment led by streaming content instead of viewing on cable -- allowed the company to accelerate its investment in its streaming services.
Before the pandemic, Disney's packed theme parks often meant visitors waiting more than an hour to experience an attraction. This means there should be a substantial buildup of pent-up demand that should materialize either in the summer of 2021, or next year.
Disney's decades-long history of maintaining customer loyalty and its prudent decision to accelerate its shift to streaming makes its business resilient to shocks. Disney knows how to provide its fans with what they want, and has demonstrated this over the years through various market cycles. Overall, Disney's prospects are excellent in the long run, and a market sell-off may allow you to buy its shares at a more favorable valuation.
Image source: Getty Images.
3. Coca-Cola
You would be hard-pressed to find a more iconic beverage than a Coke. Still, the beverage company faced a challenging 2020 as people stayed indoors. That hurt Coca-Cola (KO 0.63%) since more of its drinks are consumed outdoors. Think stadiums, theme parks, movie theatres, and restaurants -- all of which are currently operating under substantial constraints.
The good news for potential investors is that the negatives from 2020 appear to be short-term. As people get vaccines against the coronavirus and the pandemic subsides, consumption of Coca-Cola's beverages is likely going to rebound. Furthermore, the beverage-maker has a proven history of maintaining excellent profit margins. Over the last ten years, its gross profit margin has remained above 60% while its operating profit margin was always north of 23%. Selling products that people love at prices that bring in solid profits is a recipe for investing success.
And if its stock price falls along with a broader market crash, you should be able to pick up shares in this high-quality consumer goods stock at a discount.
