I'm about to say something that some of you might find disturbing, but you need to hear it: A stock market crash is inevitable.
While it's a statement that might be hard to believe given the 95% bounce-back rally in the benchmark S&P 500 (^GSPC -0.06%) since hitting its pandemic low, history conclusively shows that crashes and corrections are a normal part of the investing cycle and the price of admission to one of the greatest wealth creators on the planet.
The stars are aligning for a stock market crash
To be clear, there are a lot of aspects about stock market crashes that we're simply not going to know ahead of time. We often won't know the catalyst for a big downside move until after the fact. What's more, we're never going to know how long a crash/correction will last, or how steep the decline will ultimately be. But with 38 double-digit percentage declines under the S&P 500's belt in the past 71 years, they're certainly more commonplace than most folks realize.
If you're looking for stock market crash catalysts, look no further than how equities have responded to past bear markets. Excluding the coronavirus crash, the previous eight bear markets (dating back to 1960) have seen at least one double-digit percentage pullback within three years of reaching the bottom. Or, in plainer English, bouncing back from a bear market tends to be a bumpy ride, and not the straight line upward we've experienced over the trailing 15-plus months.
Another piece of history not on the market's side is its valuation. Even though valuation alone shouldn't be the basis of a major sell-off, bad things have happened each and every time the S&P 500's Shiller price-to-earnings (P/E) ratio has previously topped and sustained 30. The Shiller P/E ratio takes into account inflation-adjusted earnings over the past 10 years.
On Monday, July 12, the S&P 500's Shiller P/E hit 38.5, marking a nearly two-decade high. The previous four instances where the Shiller P/E topped 30 resulted in the S&P 500 eventually declining by at least 20%.
Other factors to consider here are rapidly rising inflation rates, which may push the Federal Reserve into action sooner than expected, and the spread of the coronavirus's delta variant, which could halt the reopening of the economy in various parts of the U.S. and world.
We may not like the idea of a stock market crash, but it's time to be prepared for the likelihood that one is coming.
Buy these stocks hand over fist when a market crash occurs
Of course, if you're a long-term investor, a stock market crash isn't cause for concern. Rather, it's the perfect excuse to go shopping. That's because every crash and correction throughout history has eventually been put into the rearview mirror by a bull market rally. If you buy high-quality companies when they dip during a crash, you have a very good chance to build serious wealth.
When the next market crash does occur, the following trio of stocks can be confidently bought hand over fist by investors.
The first top-notch stock you can gobble up when a stock market crash or steep correction strikes is robotic-assisted surgical systems developer Intuitive Surgical (ISRG -0.74%). I can speak from experience, seeing as how I opened a position in Intuitive Surgical during the March 2020 coronavirus crash.
What'll likely catch your attention about Intuitive Surgical is just how dominant this company is within the healthcare sector. Through March, it had installed 6,142 of its da Vinci surgical systems in hospitals and surgical centers throughout the world. This might not sound like a huge number, but it's far more systems than its competitors have been able to install on a combined basis.
Between the high cost for these systems ($0.5 million to $2.5 million) and the hours that going into training surgeons, Intuitive Surgical often hangs onto its clients for an exceptionally long time. In other words, there's virtually no concern about customer churn.
Another thing to consider here is that Intuitive Surgical operates (pardon the pun) in a highly defensive sector. Since we don't get to choose when we get sick or what ailments we develop, there's a steady need for surgical procedures in any economic environment.
But what really sells Intuitive Surgical as a stock to own is its operating margin, which is built to keep getting better over time. Throughout the 2000s, most of the company's sales were derived from its pricey but intricate da Vinci systems. However, the bulk of its revenue today comes from selling instruments and accessories with each procedure, as well as from servicing its systems. These are considerably higher-margin operating segments. Thus, as more systems are installed, these higher-margin segments will ensure that earnings growth continues to outpace sales growth.
Another no-brainer buy when the next stock market crash happens is social media platform Pinterest (PINS -1.13%).
Even though Pinterest was a clear beneficiary of the pandemic -- i.e., people being stuck in their homes and in search of entertainment/engagement -- it showed long before 2020 that it was gaining steam. In the three years prior to the pandemic, Pinterest's monthly active user (MAU) growth increased by an average of 30% a year. By the end of June, it wouldn't be surprising to see Pinterest top a half-billion monthly active users.
While U.S. users generate the juiciest average revenue per user (ARPU), the company's future actually lies with the folks signing up internationally. In the March-ended quarter, 103 million of the 111 million gained MAUs came from international markets. Having 380 million MAUs (and growing) logging in from outside the U.S. is going to improve the company's ad-pricing power and fuel ARPU significantly higher throughout the decade.
Something else to consider is that Pinterest offers one of the most targeted user platforms in the world. Its MAUs are willingly sharing the things, places, and services that interest them, which is making it really easy for Pinterest to match them up with merchants that can cater to their desires. This setup gives Pinterest a really good chance to become a serious e-commerce player.
The answer to "Why Alphabet?" can be summed up by examining its dominant internet search platform, and taking a closer look at its fast-growing ancillary operations.
For instance, GlobalStats pegs Google's share of the global internet search market at 92.5% in June 2021, and a relatively consistent 91% to 93% over the trailing year. With this sort of search dominance, it's no wonder businesses will pay a lot of money for the right to get their message in front of as many targeted eyeballs as possible. With the exception of the height of the coronavirus recession, Google's internet search ad revenue consistently grows by a double-digit percentage.
But Alphabet isn't a one-trick pony. The company's streaming content platform, YouTube, is one of the three most-visited social sites in the world. YouTube ad revenue jumped 49% in the first quarter, with annual run-rate revenue up to $24 billion. Not too shabby considering that Google acquired YouTube for $1.65 billion in 2006.
The company's cloud infrastructure segment (Google Cloud) is also growing like a weed. Cloud controlled an estimated 7% of global cloud infrastructure spending in first-quarter 2021, according to Canalys. Since cloud margins are substantially higher than ad margins, Cloud will play a key role in pushing operating cash flow higher by mid-decade.