Market crashes are impossible to predict, which is a great reason for investors to have a watchlist of stocks they are monitoring so they're ready to pounce if prices quickly drop.
In this video clip from "The 5," recorded on Nov. 9, Fool.com contributors Trevor Jennewine, Zane Fracek, and Demitri Kalogeropoulos name several stocks they'd love to purchase in the event of a quick market decline.
Trevor Jennewine: Given that we have seen some incredible gains over the past year, like Demitri pointed out, I want to put that in historical context. If you go back to 1928, the S&P 500 has fallen by about 20% or more on 21 different occasions. We get the so-called bear markets about once every four or five years. Nobody knows the future. But let's assume that the market does fall 20% tomorrow.
How would you guys react? Would you be looking to buy? If you would be looking to buy, name a company that you'd be looking to add to or start a position in. Zane, we'll start with you again.
Zane Fracek: Yeah, I would definitely look to buy if I had the cash or do nothing. I think a lot of people would add a third option in there, which is taking out debt, like in the form of margin to add, but I've never been one to do that and throw that extra leverage and the actual risk into the mix.
But I think positioning your portfolio so you're always ready for that downturn, and you're expecting it, and you're comfortable with it, is really important. If you're set up so that you're not going to lose sleep, that's the most important thing.
Being focused long-term and being focused on the actual movements of the business rather than the movements of the stock price I think are really important. I would look at a company called Enphase Energy and I would keep buying them, because if the market crashed, Enphase's stock, that's pretty volatile and would probably tank even more, but renewable energy in general is a place that I would want to be because of just the high-growth industry it's in. Renewable energy is contributing for more and more of the new energy mix in the US. On the top of that, costs are coming down.
The example that I have here is the price of lithium-ion battery cells declined by 97% in the last three decades. That's 41 times less than the last three decades.
Then what's promising is that prices are still falling steeply as the costs it have had between 2014 and 2018. Enphase is a company in the solar industry and they make micro-inverters. Basically, they're the little chips that when the sunlight hits your roof, hits your solar panels, it creates direct current. But you need alternating current to use it in your house, so the inverter mix that switchover to alternating current.
They have a really unique niche with micro-inverters rather than string inverters. They're growing really fast so I think they can continue that even through a downturn. They have plenty of cash so they're not going to need to tap the capital markets for more money.
Demitri Kalogeropoulos: Zane, I like your point there about trying to construct your portfolio in a way that you're not going to lose sleep if the market does go down. I mean, that's probably a good fact. If you are nervous in that situation, maybe you need to scale back a little bit in some of the high-growth bets. But Trevor, like you said, I'm reminded one of those 20% drops we had pretty recently and it was one for the record books.
In March of last year, I went back and revisited that month there, the market fell 28% in the first 20 days of March. I think one or two of those days were like double-digit declines, 10% in a day, definitely never happened in my lifetime.
I'm glad I didn't freak out and sell at that moment, because the market has roared back from there. Those pullbacks, like you mentioned, they usually take a lot longer to happen. The bear markets can usually develop over a month. But if another one happens tomorrow or the next couple of weeks, I think I'd load up on some more growth stocks. I feel like I have a lot of time to still let those grow. Two names on my watch list right now, the first one is Microsoft.
Everyone knows that one is a massive company, one of the over trillion-dollar market cap. I just think it's a stellar global brand, just amazing cash and it pays its dividends, so I like that. The other one is the Lululemon, ticker symbol, LULU.
I've been just admiring this athleisure apparel specialist for a long time. They've got a great brand that their customers are really engaged. I've just never pulled the trigger on that stock but it would be on my shortlist of one to pick up if I could get it at a big discount.
Jennewine: I like all three of those picks. Lululemon is on my shortlist too. That's another one I've never pulled the trigger on, but I think I would take a similar strategy. I think a lot of growth companies would probably get hit a little bit harder during a downturn.
One of the companies at the top of my list is Upstart. If you're not familiar, it's a FinTech company. Basically, the highlights are that Upstart uses AI to improve consumer access to credit. Traditionally, banks have used credit models. They consider about 8-30 variables when they're deciding who qualifies for a loan and determining the interest rate. Upstart's platform captures over 1600 variables and it cross-references all those different data points with repayment events. It's got 10.5 million repayment events right now that it uses to reference.
Each time somebody makes them a payment, its AI gets a little bit smarter and the results are impressive. Upstart, in their SEC filings, they mentioned a study that shows that their platform reduces loss rates by about 75% while holding approval rates constant.
Or you can go the other direction with that, Upstart can nearly triple approval rates while holding loss rates constant. More consumers have access to credit banks, get more business. You can find a middle point in there where you're actually increasing approval rates, keeping loss rates constant, and also decreasing the interest rates.
The company has delivered some impressive financial results too. Through the first half of the year, they generated $315 million in revenue and that was up 288%. They're profitable on a GAAP basis. I really like the direction management is going with the company.
They started with personal loans and they relatively recently expanded into auto loans. With those two markets, they're addressable. Market opportunity is about $719 billion. Then I believe they originated about $2.8 billion in loans last quarter. If we annualize that, they've captured about one percent of their market share.
Management's talked about going into other markets as well, like credit cards, mortgages, student loans, so I think this company has a lot of potential.