Buckle up, because volatility is back in a big way on Wall Street.
This past Thursday, May 5, just a day after the Federal Reserve increased interest rates by their largest amount in two decades (50 basis points), all of the major indexes crashed. Although "crash" is a bit of a subjective term, the nominal and percentage declines for all of the indexes sent shockwaves throughout Wall Street.
When the closing bell tolled, the technology-dependent Nasdaq Composite (^IXIC -0.41%) recorded its third-largest daily point decline in history (647.16 points), and at its peak intra-day decline was down by 6.01%. A 6.3% drop (at close) would have placed as one of the 20 largest percentage drops in history.
Image source: Getty Images.
Things weren't much better for the benchmark S&P 500 (^GSPC 0.02%) or iconic Dow Jones Industrial Average (^DJI 0.48%), which respectively tumbled 153.30 points and 1,063.09 points, albeit less than the Nasdaq Composite on a percentage basis. For the S&P 500 and Dow Jones, it marked their sixth and ninth largest nominal single-day point losses in history.
Stock market crashes, corrections, and bear markets can be scary. They're unpredictable, can lead to violent downswings in equities, and can tug on investors' heartstrings.
But big declines in the broader market are also an excellent opportunity to pick up high-quality stocks at a discount. Even though the S&P 500 has undergone 39 double-digit percentage declines since the beginning of 1950 -- this equates to a double-digit correction occurring, on average, every 1.85 years -- each of the previous 38 corrections, not counting the ongoing decline, have been wiped away by a bull market rally. Put another way, if you buy great companies and allow your investment thesis to take shape over time, your odds of growing your wealth are very good.
These stocks look like screaming bargains
With the market crashing, a number of innovative and time-tested businesses stand out as absolute bargains that are just begging to be bought. What follows are three of those companies.
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Wells Fargo
The first deeply discounted bargain stock that's begging to be bought by opportunistic investors is money-center bank Wells Fargo (WFC 1.68%).
Shares of the company have lost approximately a quarter of their value over the past three months. Because bank stocks are cyclical, there's concern that historically high inflation will push the U.S. economy into a recession. It's worth pointing out that first-quarter U.S. gross domestic product (GDP) did retrace 1.4%.
The other issue is that Wells Fargo admitted in 2017 to opening 3.5 million fake accounts at the branch level between 2009 and 2016. This immediate loss of trust at the consumer level, as well as the revolving door it created at the CEO position, didn't help Wells Fargo's valuation.
However, Wells Fargo has paid its penance in the form of fines to the U.S. Department of Justice and Securities and Exchange Commission. While these fines don't negate the company's wrongdoing, history has shown time and again that banking customers have a short memory span. For example, it didn't take long for Bank of America to begin growing loans and deposits shortly after the financial crisis and its attempt to charge a monthly debit-card usage fee.
More importantly, the cyclical nature of banks is precisely what makes them so attractive during market crashes and economic downturns. Even though recessions are inevitable, they typically last no longer than a few months to a couple of quarters. By comparison, economic expansions often go on for years. Bank stocks are perfectly positioned to take advantage of this natural expansion of the U.S. economy.
Wells Fargo should also benefit from the Federal Reserve's monetary policy shift. Although higher interest rates tend to slow the U.S. economy down, it means Wells Fargo can collect more net interest income on its outstanding variable-rate loans. This net interest income boost is forecast to propel earnings 24% higher next year.
Investors have the opportunity to buy Wells Fargo right now just above its book value and for less than 9 times forward-year earnings.
Image source: Getty Images.
Trulieve Cannabis
A second screaming bargain that investors can confidently buy as the market sells off is marijuana stock Trulieve Cannabis (TCNNF -1.58%). Shares have lost close to three-quarters of their value since hitting an all-time high 14 months ago.
Pardon the overdone pun, but expectations for pot stocks were high with Democrats in control of Congress. Following President Joe Biden's victory in November 2020, it was widely expected that cannabis would be legalized federally, or at worst we'd see cannabis banking reforms take shape. Unfortunately, no marijuana reforms have passed, which has left Wall Street to punish multi-state operators (MSO) like Trulieve Cannabis.
However, taking U.S. pot stocks to the woodshed doesn't make a lot of sense given that three-quarters of all states have legalized weed in some capacity, including 18 states that have OK'd adult-use consumption. As long as the federal government allows individual states to regulate their own industries, organic opportunities for MSOs abound.
What makes Trulieve Cannabis so unique among MSOs is how it's expanded. Whereas most MSOs opened up dispensaries and cultivation facilities in as many legalized states as possible, Trulieve's focus, until the past year, was almost exclusively on Florida. The Sunshine State is a medical marijuana-legal market, and Trulieve controls about half of all flower and cannabinoid oil sales.
Why saturate Florida? Aside from it being one of the nation's highest-dollar cannabis markets, saturating the Sunshine State allows Trulieve to grow brand awareness without spending big bucks on marketing. As a result, Trulieve became profitable over three years ago.
Another reason Trulieve is such an amazing buy is its acquisition of MSO Harvest Health & Recreation, which closed last year. Although this deal adversely affected the company's fourth-quarter operating results with a number of non-recurring expenses, it ultimately puts Trulieve in the driver's seat, in terms of market share, in Arizona. Cannabis sales in Arizona should eventually top $1 billion on an annual basis.
Shares of the company are currently changing hands at 20 times forward-year earnings despite a sustained growth rate of 20%, if not higher.
GM CEO Mary Barra introducing the Chevy Silverado EV. Image source: General Motors.
General Motors
A third absolute bargain opportunistic investors would be wise to buy as the market moves lower is auto giant General Motors (GM 0.91%).
Wall Street has hit the brakes on the auto industry for a variety of reasons. There have been production shutdowns and delays tied to supply chain challenges, semiconductor chip shortages for next-generation vehicles, and now there's the prospect of higher interest rates slowing loan demand for new vehicles. The cherry on the sundae is that the auto industry is cyclical. This means the negative first-quarter GDP print stands out as particularly negative for domestic automakers like GM.
But there's a lot for long-term investors to like about General Motors, even if the next couple of months prove challenging. For instance, the company's long-awaited shot in the arm of organic growth has arrived. The electrification of consumer vehicles and enterprise fleets should lead to a multidecade vehicle replacement cycle that allows GM to both gobble up electric vehicle (EV) market share and boost its operating margins.
Last year, GM increased its spending commitment on EVs, autonomous vehicles, and battery research, to $35 billion through 2025. Mary Barra, GM CEO, anticipates her company will be producing more than 1 million EVs annually in North America by the end of 2025. Further, two battery production facilities should be online by the end of next year.
What was particularly noteworthy about Barra's latest quarterly letter to shareholders is that there were more than 140,000 reservations for the Chevy Silverado EV. Barra only introduced the 2024 Silverado EV in January. That's a pretty incredible ramp-up in reservations for a high-margin EV.
General Motors is also being weighed down in the very short-term by COVID-19 lockdowns in China. In each of the past two years, GM has delivered 2.9 million vehicles (mostly combustion-engine vehicles) in the world's largest auto market. With existing brand visibility and infrastructure, GM should have a path to sizable EV market share in China.
Even though auto stocks trade at low price-to-earnings ratios, General Motors looks historically cheap. Shares can currently be purchased for about 5.7 times forward-year earnings despite the company's sales growing faster than they have in a long time.
