Wall Street and Main Street are witnessing truly unprecedented moments – and I don’t say that lightly.
While the media jumped at the opportunity to overestimate the magnitude of the iconic three-digit point movements Dow Jones Industrial Average in the past decade (for example, calling a drop of 200 points “plunge”), we have witnessed the first real market crash in a long time in the past six weeks or more.
It took the stocks just over three weeks to dive into bearish territory – a drop of at least 20% – from afar the fastest descent into a bear market we’ve ever seen. The top three indices also fell at least 30% in about a month. Historically, declines of 30% from a recent stock market peak have averaged around 11 months.
It was ugly.
But at the same time, it has become the opportunity of a generation if you are a long-term investor. This is because each previous bear market has finally been completely wiped out by a bullish rally. No matter how large or how long the decline continues, the organic growth potential of the US economy and high-quality companies has always pushed the major US indices higher. This means that the time has come for opportunistic investors to put their money to work.
For investors with additional liquidity as a result of the 2020 stock market crash, there are a number of stocks that are obvious purchases. Here are five from various sectors.
Johnson & Johnson
The first is the healthcare conglomerate Johnson & Johnson (NYSE: JNJ), which happens to be one of only two publicly traded companies with a Standard & Poor’s (AAA) credit rating higher than our own US government (AA). Indeed, S&P has more confidence in J&J to honor its outstanding debt than for the American government which reimburses its existing debts.
If that doesn’t give you some peace of mind when it comes to J&J finances, it may be the case. Since people cannot choose when they get sick or what diseases they develop, healthcare stocks should be among the least affected by 2019 coronavirus (COVID-19), or any stock market crash elsewhere. People who needed pharmaceuticals in the past month are just as likely to need them in April and beyond.
But perhaps the biggest attraction of Johnson & Johnson is how each of the three operating segments contributes to the whole. Consumer healthcare is growing slowly, but is also very predictable with strong pricing power. Medical devices have recently generated stagnant income growth, but represent the ideal long-term opportunity for an aging population. Finally, pharmaceuticals have a limited exclusivity period, but they provide most of the growth and margins for J&J.
Another obvious investment opportunity during a stock market crash is companies that provide a good or a service that has basic needs. Take electricity supplier NextEra Energy (NYSE: NEE) for example. No matter how weak the US economy performs, homeowners and renters will still need electricity for their homes. This creates a very predictable consumption range for NextEra, which helps it track its capital spending on projects.
Speaking of projects, NextEra Energy is the country’s leading supplier of solar and wind energy. While these green energy projects have been expensive, they reduce NextEra’s energy production costs far below those of its peers. Not to mention that historically low interest rates could open the door to new renewable energy projects in the foreseeable future.
Finally, keep in mind that NextEra’s traditional power generation operations are regulated (“traditional” because not powered by a renewable source). While this does not allow NextEra to pass on price increases at will, it also means no exposure to potentially volatile wholesale prices.
Adding safe, high-yielding dividend stocks to your portfolio is always a great idea during a stock market crash. This is why I would direct investors to take a closer look at the telecommunications and content giant. AT&T (NYSE: T).
AT&T mainly depends on its wireless division to increase its margins, and that is not necessarily a bad thing at the moment. AT&T is currently upgrading its US infrastructure to 5G compatibility, which represents the first major wireless infrastructure upgrade in about a decade. Investors should expect the technology upgrade cycle to continue for many years, as AT&T is likely to see increased use of data. This is all good news for a company that generates juicy margins on the use of data linked to its wireless plans.
AT&T is also preparing to launch its HBO Max streaming service in May 2020, and can probably use its Time Warner assets (CNN, TBS and TNT), acquired in 2018, like a dribble to attract more streaming users.
With a history of constant profitability, the 7.4% return from AT&T looks like contract theft for income seekers.
Companies with a clear competitive advantage are also obvious purchases during a stock market crash. This is probably why the e-commerce giant Amazon.com (NASDAQ: AMZN) has performed so well since mid-February.
Most people are probably well aware of the dominance of Amazon’s e-commerce, especially now that they are locked up in their homes and doing their part to slow the spread of COVID-19. According to eMarketer in June 2019, Amazon controls about 38% of all e-commerce. Additionally, with over 150 million Prime members, Amazon has found a way to supplement its retail margins while keeping consumers hooked to goods and services within its ecosystem.
However, retailing is not a global opportunity from Amazon. Rather, it is the operating segment of Amazon Web Services (AWS) cloud services. Cloud margins are many multiples above retail margins, which means that as AWS increases in a higher percentage of total sales, Amazon will see its cash flows explode more.
One last obvious stock to buy during a stock market crash is a conglomerate Berkshire hathaway (NYSE: BRK.A)(NYSE: BRK.B). The reason for buying in Berkshire is simple: you make Warren Buffett, one of the most successful investors of our time, your portfolio manager.
Berkshire Hathaway generates income from its investment portfolio, which currently holds 52 securities. Buffett, who oversees most investment decisions, made a living by buying stocks while others are afraid. In fact, the letter to shareholders of Berkshire Hathaway 2019 shows that, while the S&P 500 has returned 19,784% in the past 55 years, including dividends paid, the market value per share of Berkshire has increased by more than 2 744,000% over the same period. Buffett is simply good at identifying value in times of extreme fear.
Berkshire Hathaway has also acquired approximately five dozen companies from various industries and sectors that contribute to its operating results. Thus, the purchase in Buffett offers instant diversification without management fees.