Most investors aren't big fans of stock market crashes or steep corrections, but the reality is that one is very likely on its way.
Even though the benchmark S&P 500 (^GSPC 0.02%) has enjoyed a historic bounce-back rally that's seen the index climb 95% since hitting its March 23, 2020 pandemic low, both history and economic data serve as warnings of where it'll likely head next.
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A stock market crash is in the cards
Perhaps the most telltale sign of trouble can be seen in the way the market has historically bounced back from bear markets. Since 1960, there have been nine bear market declines (i.e., drops of at least 20%), including the most recent coronavirus crash, according to data from market analytics firm Yardeni Research. If we look at the previous eight bounces, every single one featured at least one double-digit percentage correction within three years of finding a bottom. In other words, rallying from a bear-market bottom is a choppy/bumpy process, and not the smooth bounce-back we've seen over the past 15 months.
Just as worrisome is the valuation of equities. The S&P 500's Shiller price-to-earnings (P/E) ratio -- the Shiller P/E takes into account inflation-adjusted earnings over the previous 10 years -- ended the previous week above 38 for the first time in nearly two decades. That's more than double the 151-year average Shiller P/E for the S&P 500 of 16.84. But it's not this deviation that's cause for concern. It's that in the previous four instances where the Shiller P/E for the S&P 500 surpassed 30, it's subsequently fallen by at least 20%.
On the economic front, inflation poses a credible threat to the market's unwavering climb. Rising prices for goods and services could cause the nation's central bank to act sooner with monetary tightening procedures. Higher lending rates could clamp down on the abundant access to cheap capital that's driven the market higher for more than a decade.
Put simply, there are no shortage of concerns that could send the S&P 500 screaming lower.
A plunging market is your cue to buy these surefire winning stocks
However, there's another side to this coin. More specifically, every single crash or steep correction in the stock market's history has eventually proved to be a buying opportunity. That's because every single crash and correction gets erased by a bull-market rally over time. If you buy winning stocks with clear-cut competitive advantages and allow your investment thesis to play out over time, buying during significant dips is a proven formula to get rich.
When the next stock market crash does occur, you'll want to have the following winning stocks on your buy list.
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UnitedHealth Group
The first winner to buy during a market crash or correction is insurance and healthcare services giant UnitedHealth Group (UNH 0.23%). Inclusive of dividends paid, UnitedHealth hasn't delivered a negative total return to its shareholders in 12 years (and counting).
Healthcare stocks are a fairly logical place to put your money to work during heightened market volatility due to their defensive nature. No matter how well or poorly the stock market and U.S./global economy are performing, people will get sick and need treatment. This creates a pretty steady level of demand for most healthcare stocks.
UnitedHealth Group is likely best known for providing health insurance through individual and corporate policies. The great thing about providing health insurance is that there's more than enough justification to boost premiums annually in order to cover future expenses. Even though speed bumps arise in the health insurance industry, UnitedHealth's insurance operations are consistently profitable and growing.
But the true lure of UnitedHealth Group is the company's Optum division. Optum provides everything from pharmacy care services to the software and information technology hospitals and health clinics rely on. Optum is growing at a much faster pace than UnitedHealth's traditional insurance operations, and it has a tendency to produce more favorable operating margins, too.
At the rate UnitedHealth's stock is appreciating, it might soon become the largest healthcare stock by market cap in the U.S.
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Palo Alto Networks
Another winning stock that investors can confidently add to their portfolios when a stock market crash arises is cybersecurity stock Palo Alto Networks (PANW 0.11%).
Like UnitedHealth, Palo Alto benefits from the fact that cybersecurity has evolved into a basic-need service. Regardless of how well or poorly the economy is performing, robots and hackers don't take a day off. As more businesses than ever move online and shift their data into the cloud, protecting enterprise and consumer data is going to increasingly fall on third-party providers like Palo Alto Networks.
For years, Palo Alto has been steadily transitioning its product suite away from physical firewalls to cloud-based subscription services. There are a number of reasons for this transition. To start with, cloud-focused platforms are nimbler and can often respond faster to threats than on-premises solutions. Over time, this also makes cloud-based subscriptions a less expensive and more efficient choice for most businesses. Additionally, subscription margins are much higher than physical firewall products, and there should be less revenue recognition lumpiness, too.
Palo Alto Networks' success is also a function of its willingness to make bolt-on acquisitions. These purchases are designed to expand its suite of cybersecurity subscription offerings and/or make the company more appealing to small and medium-sized businesses.
What management is doing is clearly working, because Palo Alto looks unstoppable.
Image source: Apple.
Apple
A third winning stock that has the potential to make you a whole lot richer if you buy it during a steep market decline is Apple (AAPL 1.27%).
Even though Apple operates in the cyclical tech sector, the company's exceptionally loyal following has turned its products into basic-need goods. Anytime Apple unveils a new product, lines typically wrap around its stores, demonstrating the customer loyalty and innovation that are at the heart of Apple's operating model.
For the next couple of years, the iPhone should remain Apple's core cash flow driver. As wireless companies upgrade their infrastructure to handle 5G speeds, consumers and businesses are liable to spend years upgrading their devices. Let's not forget that it's been a decade since we last witnessed a notable improvement in wireless download speeds.
Apple CEO Tim Cook is also overseeing a transition that should result in less lumpy revenue recognition and higher margins over time. While Apple will continue to be a leader in products, Cook is spearheading a shift that emphasizes Apple's services and platforms. Services are a sustainable double-digit growth opportunity.
Having generated nearly $100 billion in operating cash flow over the trailing 12-month period, Apple continues to prove to investors why it's such a winner.
