Investors might not like what I'm about to say, but it's an irrefutable truth: Stock market crashes are inevitable.
For many, the prospect of a double-digit percentage decline in the broad-based S&P 500 (^GSPC -0.94%) is unnerving, especially given how quickly downside momentum can build in the market. But depending on your investing time frame, a crash or steep correction might represent an incredible wealth-building opportunity.
Crashes and corrections are an inevitable part of the investing cycle
For the moment, catalysts are building that suggest sizable downside may await. From a historical perspective, there have been 38 double-digit percentage declines in the S&P 500 over the past 71 years. That's a 10% or greater drop, on average, every 1.87 years. Even though the stock market doesn't adhere to averages, it demonstrates how common it is for equities to deflate. For context, it's been about 1.67 years since the S&P 500 bottomed during the pandemic.
Along these same lines, bouncing back from the previous eight bear market bottoms has proven to be a process. Each of these rallies from a bear market bottom has featured one or two declines of at least 10% within 36 months. We're now more than 20 months removed from the bottom without a single double-digit percentage decline.
Valuation stands out as a key concern as well. On Monday, Nov. 22, the S&P 500's Shiller price-to-earnings (P/E) ratio sat at 39.5. The Shiller P/E factors in inflation-adjusted earnings over the past 10 years. Aside from this reading being more than double the 151-year average P/E of 16.89, the previous four instances where the S&P 500's Shiller P/E topped 30 led to subsequent declines of at least 20% in the index.
We've also witnessed a sharp rise in margin debt over the past year. Since 1995, there have only been three instances where capital borrowing to purchase or short-sell equities has shot higher by 60% or more in a given year: Right before the dot-com bubble burst, just months before the financial crisis, and earlier this year.
Suffice it to say, there are more than enough catalysts to suggest a stock market crash or steep correction may be brewing.
Crashes are a surefire buying opportunity
But as I noted earlier, your investing style has a lot to do with how devastating these potentially sharp moves lower in the market can be. If you're a relatively short-term trader, a crash or correction can be quite costly. But if you're willing to see your investment thesis play out over many years, a stock market crash or steep correction has historically always been a buying opportunity.
If a stock market crash does materialize, the following three surefire winning stocks would be ripe for the picking.
The first winning stock long-term investors can confidently add on a significant pullback in the broader market is payment processing behemoth Mastercard (MA -0.73%).
Whereas all table games in a casino favor the house, long-term bets on Mastercard strongly favor the patient. Even though recessions and stock market crashes are events that can't be stopped, neither event tends to last very long. Most recessions run their course in a matter of months or a couple of quarters. By comparison, periods of economic expansion are almost always measured in years.
Thus, any short-term pain that Mastercard contends with from a recession or stock market crash tends to be put in the rearview mirror by long-winded periods of economic expansion where consumers and businesses spend more.
Mastercard also happens to be a major player in the No. 1 market for consumption worldwide, the United States. With approximately 22% of credit card network purchase volume, as of 2018, it slides in as the No. 2 player. Plus, with most global transactions still being conducted with cash, Mastercard has a multi-decade opportunity to expand its infrastructure to underbanked regions of the world.
Furthermore, the company's success is derived from its processing focus. Although you'd think Mastercard would want to take advantage of interest-earning opportunities, it's not a lender. The advantage of lending avoidance is that the company doesn't have to set aside capital to cover credit delinquencies that arise during economic downturns. This is Mastercard's secret to maintaining a profit margin of more than 40%.
Bristol Myers Squibb
The beauty of most healthcare stocks is that they're highly defensive. No matter how badly the economy or the stock market perform, it doesn't stop people from getting sick and needing drugs, devices, and healthcare services. Bristol Myers certainly fits the mold of this definition as a supplier of brand-name medications.
The company has done an admirable job of developing therapies internally and with the collaboration of others. For example, cancer immunotherapy Opdivo brought in about $7 billion in sales last year and is being examined in dozens of ongoing clinical trials as a monotherapy or combination treatment. If even some of these studies prove fruitful, label expansion opportunities could push Opdivo to north of $10 billion in eventual peak annual sales.
Bristol Myers Squibb is also benefiting from its cash-and-stock deal to acquire cancer and immunology drugmaker Celgene in November 2019. The prize of this deal is multiple myeloma drug Revlimid, which looks to be on track to hit $13 billion in full-year sales. Label expansions, strong pricing power, and longer duration of use have helped Revlimid grow sales by a double-digit annual percentage for more than a decade. And don't overlook that Celgene had around three dozen cancer and immunology partnerships at the time of its acquisition, too.
With Bristol Myers Squibb already deep in value territory at roughly seven times Wall Street's forward-year earnings per share, it would be the perfect buy for patient investors if a crash strikes.
A third surefire winning stock to buy hand over fist if there's a stock market crash or steep correction is e-commerce giant Amazon (AMZN -1.70%).
Most people are probably very familiar with Amazon's utterly dominant online marketplace. According to eMarketer, Amazon's marketplace is expected to handle 41.4% of all online orders in the U.S. this year. For some context, the next-closest competitor holds about a 7% share of online sales in the United States.
Admittedly, margins for online sales aren't that good. To make up for these razor-thin margins, and to encourage users to remain loyal and active, Amazon has signed up 200 million people to a Prime membership. The fees collected from Prime members buoy the company's margins, and help it undercut brick-and-mortar retailers on price.
But the real key to Amazon's operating cash flow growth isn't online retail. Rather, it's cloud infrastructure segment Amazon Web Services (AWS), as well as other high-margin revenue channels, such as advertising and subscription services. Through September, AWS accounted for 62% of the company's $21.4 billion in operating income in 2021, despite only bringing in 13% of total sales. The higher margins Amazon is netting from its faster-growing segments (AWS, advertising, and subscription services) should help more than double its operating cash flow by mid-decade.
Amazon could well be the world's largest publicly traded company by 2025, making it a no-brainer buy during a crash or correction.