It's the three words investors dread most: Stock market crash.
Since bottoming out on March 23, 2020, the broader market has been virtually unstoppable. The benchmark S&P 500 (^GSPC 0.21%) rose by as much as 88% in 13.5 months, while the tech-heavy Nasdaq Composite gained as much as 106%. It's been a bounce-back rally for the record books -- and it may be coming to an end.
Big downside may await equities
Although we can never precisely predict when a stock market crash or correction will occur, how steep the decline will be, or how long it'll last, I feel confident in suggesting that one is on the way. That's because multiple aspects of history suggest equities are set for a significant pullback.
For example, each of the previous eight bear markets (not counting the coronavirus crash) saw at least one double-digit percentage pullback in the S&P 500 within three years of hitting its bottom. In aggregate, 13 double-digit declines were observed in the three years following these eight bear market bottoms. We're more than a year removed from the March 2020 low and have yet to come close to a double-digit pullback in the benchmark index.
Perhaps more damning is the bloated valuation of the S&P 500, as evidenced by the Shiller price-to-earnings (P/E) ratio. The Shiller P/E takes into account inflation-adjusted earnings over the previous 10 years.
On May 10, the Shiller P/E retraced from a high of nearly 38, or more than doubled the 150-year average of 16.82. Moreover, the previous four times the S&P 500's Shiller P/E ratio surpassed and sustained above 30, it subsequently fell between 20% and 89%. While the latter is highly unlikely, given the Fed's willingness to support financial markets, a 20% decline has been the historic expectation once equities reach such lofty valuations.
History also shows us that double-digit declines in the S&P 500 are normal. Over the past 71 years, there have been 38 double-digit crashes or corrections. That's one every 1.87 years.
A crash is coming -- and I stand ready to profit from it.
A stock market crash would be the perfect opportunity to buy these stocks
Since all crashes and corrections are eventually erased by a bull-market rally, major dips in the market amount to incredible opportunities to buy great businesses on the cheap. When the next panic strikes Wall Street, I'll aim to buy the following three stocks.
Within the tech space, there's not a company I want to add more if panic-selling arises than cybersecurity stock CrowdStrike Holdings (CRWD -0.50%). The company is certainly pricey based on its forward-year sales multiple, but it offers a superior product and growth rate that support an aggressive premium.
The big differentiator for the company is its cloud-native Falcon security platform. Built in the cloud and reliant on artificial intelligence, Falcon oversees approximately 5 trillion events each week and grows smarter at identifying and responding to threats. Because Falcon's efficiency is constantly improving, the total cost of CrowdStrike's cloud-based subscriptions can be lower than on-premises security solutions.
Amazingly, CrowdStrike has already hit its long-term subscription gross margin target of 75% to 80%+, despite the fact that it's still in the very early innings of its growth. Customer growth has risen by a triple-digit percentage in three of the past four years, and 63% of its customers have purchased at least four cloud module subscriptions, which is up from 9% of its clients less than four years ago.
In sum, it's the premier name to own in cybersecurity.
If history and emotions come together to create a stock market crash, marijuana stock Cresco Labs (CRLBF 3.03%) will absolutely be on my buy list. The U.S. is ground zero for the cannabis boom, and U.S. multistate operators (MSO) like Cresco should benefit from persistent double-digit annual weed sales growth.
Like other MSOs, Cresco has a burgeoning retail presence. The company now has north of 30 operational dispensaries, following the closure of its Bluma Wellness acquisition.
What's interesting about Cresco, though, is that it's chosen to focus on a number of states where retail license issuance is limited. In doing so, it's also limiting the number of competitors it'll contend with, thereby giving its proprietary products and brands a chance to stand out.
But what makes Cresco unique is its heavy helping of wholesale cannabis. Wholesale is often looked down upon by Wall Street for its lower margins, relative to retail weed sales. However, Cresco holds one of only a small handful of marijuana distribution licenses in California, the No. 1 pot market in the world by annual sales. Cresco can place products into more than 575 dispensaries throughout the Golden State.
If I had to choose my favorite pot stock right now, it's Cresco Labs.
In terms of unbridled growth, there's no stock I'm more eager to add during a period of panic-selling than Singapore-based Sea Limited (SE -4.46%). The company has a trio of exceptionally fast-growing operating segments.
For the moment, Sea's gaming division is its shining star. With people stuck in their homes due to the pandemic, the company's entertainment segment saw quarterly gaming users rise 72% year over year to about 610 million. What's more impressive is that paying quarterly gaming users jumped 120% to 73 million. Having roughly an eighth of its gamers as paying customers is a good way to generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA).
Sea also has a fast-paced digital financial services segment. Last year, it oversaw $7.8 billion in payments and finished the year with north of 23 million paying mobile wallet users. A number of the regions Sea operates in have limited access to basic banking services. The company's mobile wallet solutions may be able to resolve these deficiencies.
But the most exciting growth potential comes from its e-commerce platform Shopee. The gross merchandise value traversing its platform doubled in 2020 to $35.4 billion, with gross orders up 133% to 2.8 billion. Since it's targeting a number of emerging markets with burgeoning middle classes, Shopee is just scratching the surface of its long-term potential.