Whether you realize it or not, Wall Street and investors are enjoying a truly historic run. It took less than 17 months for the benchmark S&P 500 (SNPINDEX:^GSPC) to double in value since bottoming out in March 2020. Additionally, the biggest pullback endured by investors over the past 11 months is just 5%. This has been the strongest bounce-back rally from a bear-market bottom of all time.
Unfortunately, there are also plenty of warning signs that this perfect rally may soon end.
History may not be the market's friend in the near term
To preface the commentary below, we're never going to know ahead of time precisely when a stock market crash or steep correction will occur, how long it'll last, or how steep the decline will be. Nevertheless, the data clearly 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.
For instance, the way the S&P 500 has responded following each of the previous bear-market bottoms, dating back to 1960, is telling. We've witnessed either one or two declines of at least 10% within 36 months following a bear market trough. We've yet to navigate our way through a double-digit percentage decline after the March 2020 bottom (19 months and counting).
Another telltale warning for investors is the valuation of the S&P 500. As of the close of business on Monday, Oct. 25, the S&P 500's Shiller price-to-earnings (P/E) ratio stood at 38.9, which is well over double its 151-year average (16.9). The bigger concern is that in each of the previous four instances where the S&P 500's Shiller P/E ratio surpassed 30, the index subsequently lost 20% (or more) of its value.
Even margin debt serves as a focal point of concern. Margin debt describes the amount of money borrowed with interest to purchase or short-sell securities. While it's not abnormal for margin debt to increase over time, it isn't normal for margin debt to increase 60% or more in a single year, as it's done in 2021. The previous two times we've watched margin debt climb at least 60% in a year since 1995 were just before the dot-com bubble burst and months before the financial crisis (2007-2009).
Long story short, a crash or correction may well be on the horizon.
This stock trio offers surefire opportunity during a crash
However, there are two sides to every story. While stock market crashes and corrections might lead to some temporary red ink in investors' portfolios, these natural downturns also serve as the perfect opportunity to buy great stocks at bargain prices. If a stock market crash were to occur, investors shouldn't hesitate to buy the following three stocks hand over fist.
Cybersecurity is easily one of the greatest growth trends over the next decade. Regardless of how well or poorly the stock market or U.S. economy are performing, hackers and robots don't take a day off from trying to steal consumer and enterprise data. That's why any significant dips in CrowdStrike Holdings (NASDAQ:CRWD) are a hand-over-fist buying opportunity.
What makes CrowdStrike so special is its Falcon security platform. Falcon is a cloud-native solution that relies on artificial intelligence to grow smarter and more efficient at recognizing threats over time. According to the company, Falcon oversees approximately 1 trillion events per day. In many instances, cloud-native solutions are faster and more cost-effective at identifying and responding to threats relative to on-premises security solutions.
CrowdStrike's operating results show what a monster it's become in the cybersecurity space. The company's subscriber count has grown from 450 to north of 13,000 in less than five years. Likewise, the percentage of subscribers with four or more cloud-module subscriptions has catapulted from under 10% to 66% in the same less-than-five-year time frame. These are high-margin subscriptions, and the company's clients seem more than willing to add on services as they grow.
Despite still being in its early growth phase, CrowdStrike's subscription gross margin has already hit the company's long-term target of around 80%. This makes CrowdStrike a no-brainer buy for investors on any weakness.
Bank of America
Bank stocks might not be the first thing that comes to mind during a stock market crash, but in this unique instance, Bank of America (NYSE:BAC) is a company investors can confidently buy hand over fist.
Generally speaking, bank stocks like BofA benefit from the natural growth of the U.S. economy over time. Even though recessions are an inevitable part of the economic cycle, they often last for a few months to a couple of quarters. Meanwhile, periods of economic growth last for years. These long-winded periods of expansion allow Bank of America to take advantage of the bread-and-butter of banking: Loan and deposit growth.
The interesting thing about Bank of America is its interest rate sensitivity. No money-center bank will see a bigger windfall from higher interest rates than BofA. According to a third-quarter earnings presentation, a 100-basis-point parallel shift in the interest rate yield curve would add an estimated $7.2 billion in net interest income over 12 months. With yields near historic lows, they pretty much have nowhere to go but up.
Bank of America has also done an excellent job of promoting digital banking. The number of digital active users has grown by almost 5 million in three years, with 43% of all sales in the third quarter completed online or via mobile app. That's up 16 percentage points from Q3 2018. This online shift has allowed the company to reduce its expenses by consolidating some of its physical branches.
For more than a decade, Square's seller ecosystem has been its foundational operating segment. The seller ecosystem provides point-of-sale devices, loans, analytics, and other tools to help merchants succeed. After seeing $6.5 billion in gross payment volume (GPV) traverse its platform in 2012, Square's GPV might top $150 billion in 2021.
An interesting trend within this segment is the shift toward bigger businesses using Square's payment solutions. Whereas Square's merchant solutions have previously catered to small businesses and entrepreneurs, 65% of all seller ecosystem GPV originated with businesses generating $125,000 or more in annual GPV during the second quarter. Bigger businesses should lead to more revenue and gross profit for Square.
Of course, the more substantive long-term growth driver is peer-to-peer digital payments platform Cash App. In just three years (ended Dec. 31, 2020), Cash App's monthly active user (MAU) count more than quintupled to 36 million. Additionally, gross profit per user has more than doubled to $55 per MAU, as of June 2021. This compares to only $5 in costs to attract each new MAU.
With Square recently announcing the acquisition of buy now, pay later giant Afterpay for $29 billion, it'll soon have a closed-loop payment system that'll connect Cash App to the seller ecosystem. In other words, growth for Square is still in its early stages.