You may not like what I'm about to say, but the data doesn't lie: Stock market crashes happen frequently, whether we want them to or not.
Since the beginning of 1950, the benchmark S&P 500 (^GSPC 0.52%) has undergone 38 double-digit percentage declines. Put in another context, we're talking about a crash or correction, on average, every 1.87 years. We're already more than 16 months removed from the bear-market bottom hit on March 23, 2020, which fully suggests that a crash or correction may be brewing.
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The likelihood of a crash or correction is growing
If you want more concrete evidence that trouble could be on the horizon, take a closer look at 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. On August 2, the S&P 500's Shiller P/E closed at 38.1, which is almost a two-decade high. However, the bigger concern is that in each of the four previous instances throughout history where the S&P 500's Shiller P/E crossed above and sustained 30, the index subsequently declined by at least 20%.
History isn't all too kind following bear-market bottoms, either. Not counting the coronavirus crash, there have been eight bear markets since the beginning of 1960. In the three years following each bear market bottom, every bounce-back rally endured a double-digit percentage crash or correction. In fact, five out of eight rallies from a bear-market bottom featured two declines of at least 10% within three years. We've yet to even come close to a double-digit percentage pullback since the March 2020 bottom.
And there are other concerns, too. For example, delta variant cases of the coronavirus disease 2019 (COVID-19) are surging in various parts of the U.S. and around the world. As COVID-19 delta variant cases climb, the likelihood of restrictions being put back into place grows.
Rapidly rising inflation is another core worry. Although the nation's central bank feels high levels of inflation are only temporary, rapidly rising prices for goods and services could diminish the buying power of consumers and businesses, ultimately slowing the U.S. economic bounce back.
Long story short, it's never a matter of if the stock market is going to crash. It's simply a matter of when.
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A crash would be the perfect time to buy into these superior stocks
But there's good news on this front. While crashes and steep corrections are common, so is the likelihood of bull market rallies putting market declines in the rearview mirror over the long run. Every single one of the S&P 500's 38 double-digit percentage declines were eventually erased by a bull-market rally. Thus, stock market crashes are actually a blessing in disguise for patient investors who buy stakes in high-quality businesses.
If a stock market crash is around the corner, as history would seem to imply, the following trio of stocks would be ripe for the picking.
This first stock that becomes something of a no-brainer buy if the market takes a nosedive is social media kingpin Facebook (META 1.04%).
The answer to "Why Facebook?" can be readily seen in the company's user data from the second quarter. As of the end of June, Facebook had 2.9 billion people visiting its namesake site on a monthly basis, as well as 610 million additional unique viewers visiting WhatsApp and/or Instagram, which it also owns. On a combined basis, we're talking about 3.51 billion monthly active users, or roughly 44% of the global population visiting an owned asset each month. Advertisers are fully aware that there's not a social platform in the world that can spread their message to a broader audience than Facebook.
Furthermore, Facebook stands to benefit from what I like to call the "numbers game." You see, Facebook generates in the neighborhood of 97% to 98% of its revenue from advertising -- and advertising spending tends to be cyclical. This is to say that ad spending is robust when the U.S. and global economy are growing, and potentially depressed when recessions strike. The thing is, periods of economic expansion last disproportionately longer than recessions. Thus, a long-term bet on Facebook gives investors a great opportunity to take advantage of a growing U.S. and global economy.
Perhaps the best thing about Facebook is that it hasn't even meaningfully monetized all of its core assets. Currently on track for well over $100 billion in ad revenue in 2021, Facebook has yet to generate significant revenue from Facebook Messenger or WhatsApp, both of which are exceptionally popular social destinations. When Facebook does monetize these assets, it'll enjoy another surge in sales, cash flow, and profit growth.
Image source: Getty Images.
Cresco Labs
Another superior stock that'd be perfect to buy if the stock market crashes is U.S. marijuana stock Cresco Labs (CRLBF -1.24%).
To get a key point out of the way, federal legalization isn't necessary for U.S. pot stocks to thrive. As long as the federal government allows individual states to regulate their own weed industries (something 36 states are already doing), the industry can generate tens of billions of dollars in annual sales. And since cannabis acts like a basic-need consumer good, we know that a short-term crash or correction isn't going to meaningfully impact pot product buying habits.
Like virtually all multistate operators (MSO), Cresco Labs has a burgeoning retail presence. In June, the company opened up its 33rd national dispensary, and it holds enough licenses in its back pocket to get this figure to around four dozen dispensaries over time. What's noteworthy about Cresco is that it's primarily chosen to focus on states with limited retail and cultivation license issuance. Targeting states that purposefully dial back competition should help ensure that it secures a healthy percentage of market share in a number of current or future billion-dollar cannabis markets.
But what allows Cresco Labs to really stand out is its industry-leading wholesale operations. Wall Street regularly discounts wholesale cannabis because of its lower margins, relative to the retail side of the equation. However, Cresco more than makes up for its lower margins on the volume front by having access to over 575 dispensaries in California, the biggest cannabis market in the world. This combination of retail and wholesale makes Cresco one of the most-balanced pot stocks investors can buy.
The 2022 all-electric Ford F-150 Lightning Pro. Image source: Ford.
Ford Motor Company
A third high-quality stock that'd be perfect to buy during a stock market crash or steep correction is Detroit auto giant Ford Motor Company (F 1.74%).
For much of the past two decades, auto stocks have been relatively slow-growing and weighed down by high levels of debt. As a result, most have been valued at discounted P/E ratios that recognize the industry's cyclical nature. But the auto industry and companies like Ford are on the precipice of a multi-decade growth trend that could finally lead to the sales, profit, and P/E multiple expansion investors have been waiting for.
According to Ford, it plans to spend at least $30 billion on electric vehicles (EV) and battery technology innovation by 2025, with the goal of launching 30 new EVs globally by mid-decade. By the end of the decade, an estimated 40% of its sales volume could derive from EVs. This vehicle replacement cycle isn't going to happen overnight, which means Ford can enjoy years, if not decades, or consumer and enterprise-level vehicle replacement.
Ford also has an opportunity to become a major player in China, which is the largest auto market in the world. It's been estimated by the Society of Automotive Engineers of China that half of all vehicle sales could be powered by alternative energy by 2035. Since Ford already has a presence in China, and its infrastructure is established, it's a good bet to secure EV share in China.
Additionally, it'd be foolish (with a small "f") to overlook Ford's dominance with its F-Series pickups. The F-Series has been the top-selling truck for more than four decades, and it's been the best-selling vehicle in the U.S. for 39 consecutive years. Since truck margins are juicier than what Ford nets from sedans, the continued dominance of the F-Series pickup is paramount to it and its shareholders success.
