Stocks have had a remarkable run in recent years. Even after the market had to climb back from the plunge it endured early in 2020, the S&P 500 has doubled in value over the past five years.
Of course, nothing lasts forever, and with many stocks nearing their all-time highs and the market looking frothy, there is growing chatter about when the next crash will come.
No one can know exactly what Wall Street will do over the next day, week, month, or year. But this does seem like a good time to at least be planning for the possibility of an economic downturn, and considering what stocks you might want to be holding for defensive purposes if the market does go south.
When the tide goes out, you'll be glad you're swimming with the master
Lou Whiteman (Berkshire Hathaway): Warren Buffett's Berkshire Hathaway has underperformed the broader market over the past five years, leading some to wonder if the Oracle of Omaha might have lost his fastball.
Berkshire has added a few tech stocks including Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) to its holdings in recent years, but its portfolio is not designed to compete against the sort of NASDAQ-fueled tech rally we have seen. However, it is set up well to survive a downturn, with broad exposure to a number of sectors that tend to hold up even when the tech sector is sinking.
Berkshire Hathaway makes a significant amount of its money from the insurance and utility sectors, which aren't particularly sexy in good times, but which fare well in bad ones because of their steady income streams. It also owns Burlington Northern Santa Fe, one of the two primary freight railroads serving the Western United States.
The company's stock portfolio contains an assortment of value investments, including a basket of the nation's largest banks, Coca-Cola (NYSE:KO), and supermarket operator Kroger (NYSE:KR). Berkshire also has more than $140 billion in cash that it can put to work buying assets should equity prices drop.
The bottom line is the best thing you can do to prepare for a downturn is to buy a basket of quality companies, and remember not to panic sell when the bear emerges. Buying Berkshire gives you that diversification, with the added benefit of steady hands overseeing the portfolio.
Buffett in his 2004 letter to shareholders likened investing to swimming in the sea, saying "only when the tide goes out do you discover who's been swimming naked." With Berkshire, expect no surprises.
One of 2009's best stocks could be great again if the market crashes
John Rosevear (Ford Motor): Ford and its longtime investors learned a lot from the big market crash of 2008 and early 2009. Among other things, Ford learned the value of having a big cash reserve that helped it continue new-product development while rivals were slashing budgets -- and investors learned (or relearned) that shares of automakers with fresh products tend to rise early in economic recoveries.
2020 was a hard year for the global auto industry, but Ford came through it in fine shape. It did take on a lot of new debt after idling its factories last spring because it remembered that lesson about having cash in a crisis. But as it turned out, Ford didn't need the reserve: As of the end of the year, its cash on hand exceeded its debt by almost $7 billion.
Ford's outlook for 2021 is pretty bright, with one caveat that we'll get to in a moment. The company is ramping up inventories of its all-new F-150, its most profitable product (and a product that tends to be extra-profitable in its first year after a redesign.) Ford has also begun deliveries of the compact off-road Bronco Sport and the electric Mustang Mach-E, it has the larger Bronco coming mid-year, and deliveries of the important battery-electric Transit commercial van (called e-Transit) will begin this fall.
That caveat? As a result of high demand for new personal computers due to the necessities of social distancing, there's a global shortage of microchips -- and those are used in modern vehicles too. This has led a number of global automakers, including Ford, to reduce production of key models. As of right now, it's not clear whether the shortage will ease in a few weeks or whether it could last for several months. It's something that auto investors should watch.
Still, I think Ford will be a great stock to be holding if the market crashes this year. Yes, its stock price will go down for a while. But the automaker's hefty cash hoard and strong product pipeline should help it recover (and then some) ahead of the overall market, just as it did in 2009 and 2010.
This defense stock has staying power ... and firepower
Rich Smith (General Dynamics): Stock markets boom and stock markets crash. In good times and bad, though, I think you can rely upon a reasonably priced defense stock to hold up reasonably well -- and that's why I would suggest investing in General Dynamics today.
What makes a defense stock "reasonably priced?" I've long argued that the natural valuation for such companies has historically been a price equal to their annual sales, and General Dynamics stock is trading close to that right now. One of the cheapest defense stocks on the market, its price-to-sales ratio now is about 1.1. Measured against earnings, its shares sell for a svelte 13.8 times profits. (Compare that to the price-to-earnings ratio of 39 for the now overpriced S&P 500).
Of course, even the cheapest stock may be no great bargain if it lacks growth prospects. So how does General Dynamics stack up in that regard?
Probably best known for its M1 Abrams Main Battle Tank, General Dynamics has been a defense industry stalwart for decades, but I actually think the company's other units could perform even better than its combat systems division, which is the one that makes the tanks.
Its aerospace business, for example, doesn't make the fighter jets or bombers you might expect from a defense contractor. It produces Gulfstream business jets, which might have just gotten a bit more appealing to executives leery of flying commercial in the middle of a pandemic. And General Dynamics' marine systems division (which does focus on military products) is perfectly positioned to benefit from the U.S. Navy's long-range plan to grow its battle fleet by more than 20% to 355 ships.
Supported by growth from these two segments in particular, analysts are forecasting that General Dynamics will grow its earnings by roughly 10% in each of the next three years. For a 13.8 P/E stock paying a 2.9% dividend yield, that looks just about right to me.