Folks, I've got some good news and some "bad news," depending on your perspective.
On the bright side, the benchmark S&P 500 (^GSPC -0.22%) has enjoyed a historic bounce-back rally from its March 2020 low. We're nearly 20 months removed from the bear-market bottom set during the initial stages of the pandemic, and the S&P 500 has more than doubled in value.
The "bad" news is that the potential catalysts for a stock market crash or steep correction are building.
Image source: Getty Images.
Is a stock market crash on the horizon?
For example, last week we witnessed the broad-based S&P 500's Shiller price-to-earnings (P/E) ratio eclipse 40 for only the second time in history. The Shiller P/E examines inflation-adjusted earnings over the last 10 years. Although valuation alone is rarely ever the catalyst for a steep correction or a crash, it is ominous that following the previous four instances where the S&P 500's Shiller P/E crossed above 30, the index subsequently shed at least 20% of its value.
It's not just historic valuations that are concerning. Dating back to 1960, there have been eight bear markets, not counting the coronavirus crash. Following each and every one of these eight bear-market bottoms, there were either one or two drops of at least 10% within 36 months. What this tells us is that bouncing back from a bear market is a process that takes time. For the past 20 months, the S&P 500 has made a beeline to the heavens.
There are more tangible concerns as well. Inflation readings from October showed a roughly 31-year high for the pace at which the price for goods and services is climbing. While it's perfectly normal for inflation to be present in a growing economy, high levels of inflation (6%+) threaten to reduce the purchasing power of consumers and businesses.
There's also been a large uptick in margin debt in 2021. Margin debt describes the amount of money borrowed with interest to buy or short-sell securities. While we'd expect margin debt outstanding to rise over time, it's not common for margin debt to climb 60% or more in a single year, as it did earlier this year. The only two times that's happened previously, dating back to 1995, is right before the dot-com bubble burst and months before the financial crisis took shape.
Stock market crashes are an inevitable part of the investing cycle, and it's possible one could be brewing.
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Crashes and steep corrections breed opportunity for the patient
But as I stated earlier, crashes and steep corrections are only bad news based on your perspective. If you're a short-term trader who's attempting to time the market, a sudden, steep drop in equities can be quite painful. But if you're investing in great businesses for many years and allowing your investment thesis to play out over time, crashes and corrections are nothing more than opportunities to buy stocks at a discount.
In fact, one of the smartest moves you can make if a crash occurs is to buy cutting-edge, innovative businesses. Companies on the leading edge of innovation tend to deflate more than the overall market during crashes, but can offer life-altering return potential for patient investors. Here are three such cutting-edge stocks to buy if there's a market crash.
CrowdStrike Holdings
The first innovative stock that would be perfect to buy during a crash or correction is cybersecurity company CrowdStrike Holdings (CRWD 0.14%).
The beauty of cybersecurity is that it's evolved into a basic need service for businesses of all sizes. In the wake of the pandemic, businesses are shifting their data into the cloud at a rapid pace. Since robots and hackers don't take a day off from trying to harvest data, third-party providers like CrowdStrike will be increasingly leaned on to protect this information.
At the heart of CrowdStrike's success is its cloud-native Falcon platform. Falcon leans on artificial intelligence to grow smarter at recognizing and responding to potential threats over time. Because it was built in the cloud, it's far nimbler than on-premises security solutions and, frankly, a better long-term value based on the level of protection it can provide. On average, Falcon oversees about 1 trillion events per day. In other words, a crash or correction isn't going to halt the need for cybersecurity services.
If describing the effectiveness of Falcon doesn't do it for you, perhaps a quick look at the company's operating performance will do the trick. In 4.5 years, CrowdStrike's subscribing customer count has catapulted from 450 to north of 13,000, with the number of customers purchasing four or more cloud-module subscriptions growing from less than 10% to 66%, as of the most recent quarter. CrowdStrike isn't the cheapest cybersecurity option, but a retention rate of about 98% suggests businesses love it.
A case line in the Planet 13 Las Vegas SuperStore. Image source: Planet 13.
Planet 13 Holdings
When you think of marijuana stocks, the idea of cutting-edge innovation may not come to mind. After all, we're talking about a plant. But U.S. multi-state operator (MSO) Planet 13 Holdings (PLNH.F -3.87%) brings a level of innovation to the table in the pot industry that we've not yet seen.
Before diving into why Planet 13 is a perfect cutting-edge stock to buy during a crash, I believe it's important to address the elephant in the room: The lack of U.S. federal cannabis reform. Even though it would make life easier for MSOs if Capitol Hill would legalize cannabis or reform marijuana banking laws, it's not necessary for the industry to thrive. To date, 36 states have legalized marijuana in some capacity.
What makes Planet 13 so special is the way it's approached its expansion. Virtually all MSOs have planted their proverbial flags in as many potential billion-dollar markets as possible. Meanwhile, Planet 13 has only two operating locations. The key is that Planet 13 is focused just as much on the experience as it is on making a sale.
The Planet 13 SuperStore just west of the Las Vegas Strip in Nevada is larger than the average Walmart and features a café, events center, and consumer-facing processing center. Meanwhile, the Orange County SuperStore in Southern California spans 55,000 square feet with 16,500 square feet of selling space. Sporting local resident and tourist appeal, Planet 13 is the best of both worlds in the cannabis space.
With the company on the verge of recurring profitability, any major market weakness would represent an opportunity to buy.
Image source: Getty Images.
Novavax
A third cutting-edge company just waiting to be scooped up during a crash or steep correction is biotech stock Novavax (NVAX).
Although Pfizer/BioNTech and Moderna have garnered most of the accolades for their development of coronavirus disease 2019 (COVID-19) vaccines, Novavax looks primed to be the third major player. In two large-scale clinical studies, NVX-CoV2373 generated a vaccine efficacy (VE) of 89.7% (U.K.) and 90.4% (U.S. and Mexico). Even though VE is just one of many key figures from the company's clinical trial, a 90% VE could be more than enough to unseat other less popular vaccine options.
The biggest issue for Novavax had been delays in filing for emergency use authorization in key markets, as well as a report that purity standards for its vaccine weren't hitting the mark. Both of these challenges are being worked through. The company garnered its first authorization worldwide (Indonesia) at the beginning of the month, and it's filed for the equivalent of EUA in a number of other markets.
What might really set Novavax apart from its competition is its work on a combination COVID-19/influenza vaccine. The company's drug-development platform absolutely has the potential to deliver a vaccine that can cater to two serious illnesses at once. If Novavax can beat the major drugmakers to market with a combination therapy, the sky's the limit.
